My client wishes to augment their flex plan and offer a 50% match of Medical Expense to $125 max, and Day Care to $208 max if the employees elect not to participate in the Health Plan. Is this leagal? I forsee that there will be employees drop coverage alltogether just to get the 50% match. Can you please advise?

I don't see why not. I would still expect anyone who waives coverage to show proof of other coverage before being able to "collect" the match. The match is just serving the purpose to incent those employees with double coverage off of the plan, which is fine. I would not allow the match for anyone who cannot show proof of other coverage.