An employer wishes to provide employee retirement health care benefits. The firm faces a current marginal tax rate of 24% and expects to face a 24% rate in the future. On average, employees face a current tax rate of 31%, which is expected to fall to 28% in retirement. The firm earns 12% pretax in its pension account and 15% pretax from its own operations. The average time until retirement for employees is 25 years. The firm is considering funding the promised retiree health care costs through either a sweetened pension benefit or on a pay-as-you-go approach. Under the pay-as-you-go approach, the benefit to employees will be provided as part of a fringe benefit package that is tax deductible to the employer, and the employees are not taxed on the receipt of the benefit.

Under the "sweetened pension" option, what amount must the pension yield in year 25 to cover $1 of employee medical expenses?

What is the present value of the employer's cost of providing that amount? Under the "pay-as-you-go" option, what amount must the employer pay in year 25 to cover $1 of employee medical expenses?

Based purely on the estimated after-tax cost of the options, what option does the employer prefer?

Based purely on the estimated after-tax benefit of the options, what option does the employee prefer?