Our company was cancelled by our health insurance provider, for lack of participation. Only about 45% of the employees took advantage of the insurance. Some of the people are able to pick up coverage under a spouse's plan, and some have even found reasonable individual policies. Can we reimburse these people for what their new coverage will be tax-free? Under section 106 it appears that we can. Also, do we have to extend this offer to new employees going forward? We would only like to cover the employees that were taking advantage of this benefit on the date of cancellation.

See Rev Rul 61-146. Employer can reimburse employee who has obligation to purchase insurance policy or employer can pay insurer directly. The ruling spells out the requirements to do it on a tax free basis inder IRC 105 and 106.