Can an employer sponsor a legal services plan that is tax favored either to employer or employee?

Yes. IRC section 120.

Am I misunderstanding something, or doesn't that code say that exemption expired back in 1992?

As far as I know it did and that is why it is has not since been allowed in section 125 cafeteria plans.

However, that does not mean that it could not be employer paid and deductible as an expense by the employer. I think that the premiums paid would be includable in the employee's gross income and taxable, if not, I am not sure that the benefits would be tax free. But I doubt that this is what the OP had in mind.

Usually I see legal plans paid by the employees on an after tax basis. The employer only provides the payroll deduction facility thereby getting group qualifications. The better legal plans (Hyatt and ARAG) are all group plans as far as I recall.

Thanks G. So really the answer to the original question, should be no, there is no way to do it tax favored?