I suggested an in leu of 125 plan to a company and they are looking at simply denying coveraage to anyone covered under the insurance of a spouse? Does anyone know of any problems with this idea?

companies that do this usually create alot of problems for themselvees, morale, etc.
legally, i believe it's allowed but also depends upon size of group, funding, ie. self funded or fully insured, etc.
if self-funded, eligibility rules from Plan document would allow it.

Can you explain what you mean by an" in lieu of 125 plan" ?