Not only that, i'm sure with the combination of the photoshop stuff and a bit of scritping it is easily resulvable, providing you can use photoshop. You could make the overall fog layer, then when your done, cut out all the stuff that should be below the character and leave the rest. Then you could display 2 fog layers - one with the z values above the player and the second layer always being below the player. As you cut out the second layer from the first, as long as you set it to display at the same percentage, you wouldn't have to concern yourself with overlapping.
Would that work? I can't script at all but it seems feasible to me.