(1)  I agree.
(2)  It is only allowed in connection with a "Small Employer HRA" at §9831(d).  HOWEVER, I was wrong --  there is no way this employer would qualify for a Small Employer HRA.  One of the requirements of a Small Employer HRA is that they don't have a 'group' health insurance policy (besides the Small Employer HRA), so this employer would not qualify.