WageWorks, FlexDirect, Commuter Check, RideECO, etc., or vouchers that can be used to buy tickets. The money is taken out of an employee's paycheck before tax, which effectively reduces the employee's taxable income by up to $2,880 a year.
After 2013, the monthly limit goes back down to around $125 a month, unless Congress increases the limit again.
To answer the most frequently asked question about TransitCheks and eTRAC cards:
Yes, the money can be used to buy MetroCards or other tickets for someone else. The employee does not have to personally use all of the public transportation himself (or herself).
Treasury Regulation section 1.132-9(b) Question and Answer 18 provides: What are the substantiation requirements if an employer
distributes transit passes? "There are no substantiation requirements if the employer
distributes transit passes. Thus, an employer may distribute a transit
pass for each month with a value not more than the statutory monthly
limit without requiring any certification from the employee regarding
the use of the transit pass."
On a related note, the money does not have to be used solely for transportation between home and work. Obviously someone who buys a monthly MetroCard can ride the subway on the weekend. Less obviously, the money can be spent on Amtrak tickets or on public transportation in another city while on vacation.
Technically, Internal Revenue Code section 132(f) provides that an employee is not taxed on "any transit pass" received by the employee from the employer. The term “transit pass” means "any
pass, token, farecard, voucher, or similar item entitling a
person to transportation (or transportation at a reduced
price) if such transportation is (i) on mass transit facilities (whether or not publicly
owned)," or (ii) in a bus or van that seats at least six people and carries mostly people who work at the same place.
The above statute answers the second most frequently asked question, one that is also raised by the beginning scene in the movie The Devil Wears Prada:
No, the money cannot be used to pay for a cab to work.
Section 132(f) was enacted by the Energy Policy Act of 1992, which allowed $60 per month of transit passes as a tax-free "qualified transportation fringe" benefit. Before then, employees could receive only $21 per month of transit passes as a tax-free "de minimis fringe" benefit, under a different rule.
Congress clearly thought that a $39 per month reduction in taxable income would provide a significant boost to public transportation use.