New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

Eliot Spitzer
Governor

Eric Dinallo
Superintendent

The Office of General Counsel issued the following Opinion on May 30, 2007 representing the position of the New York State Insurance Department.

Re: Limited Liability Companies, Small Group Health Insurance

Question Presented

Is a company formed pursuant to the New York Limited Liability Company (“LLC”) Law (McKinney 2007 Pamphlet) with two “members” and no other employees eligible to purchase small group health insurance?

Conclusion

Yes. The company may purchase small group health insurance because the “members” would be considered “employees” within the meaning of New York Insurance Law § 4235(d)(1) (McKinney 2007).

Facts

The inquirer indicates that an entity with two members was recently formed pursuant to the New York LLC Law. One of the members is primarily involved in running the business, while the other has a more passive role. The inquirer notes that at present there are no other employees, but that as business increases, the entity will hire additional employees. The inquirer asks whether the two “members” are “employees” as defined in Insurance Law § 4235(d)(1), such that they may obtain small group health insurance.

Analysis

New York LLC Law § 102(m) is relevant to the inquiry. It defines a limited liability company as follows:

‘Limited liability company’ and ‘domestic limited liability company’ mean, unless the context otherwise requires, an unincorporated organization of one or more persons having limited liability for the contractual obligations and other liabilities of the business , . . . , other than a partnership or trust, formed and existing under this chapter and the laws of this state.

Similarly, LLC Law § 102(q) defines a “member” of a limited liability company as follows:

‘Member’ means a person who has been admitted as a member of a limited liability company in accordance with the terms and provisions of this chapter and the operating agreement and has a membership interest in a limited liability company with the rights, obligations, preferences and limitations specified under this chapter and the operating agreement.

A limited liability company may be operated directly by its members, see LLC Law § 401, or by a manager, see LLC Law § 408. It is surmised that the entity you describe is operated by its members.

The powers of a limited liability company are set forth in New York LLC Law § 202:

Unless the articles of organization provide otherwise and subject to any limitations provided in this chapter or any other law of this state, a limited liability company may: . . .

(q) have and exercise all powers, in addition to those set forth in subdivisions (a) through (p) of this section, not inconsistent with law, necessary or convenient to effect any or all of the purposes for which the limited liability company is formed. In order for a limited liability company to exercise the powers enumerated in this chapter, it is not necessary to set forth such powers in the articles of organization.

Given the “catchall” power set forth in LLC § 202(q), it appears that a limited liability company has the authority to purchase group health insurance for its members and employees.

The Insurance Law provides that employers, among others, may purchase group health insurance policies. :Insurance Law § 4235(c)(1)(A) provides:

A policy issued to an employer . . . which employer . .. shall be deemed the policyholder, insuring with or without evidence of insurability satisfactory to the insurer, employees of such employer, and insuring, except as hereinafter provided, all of such employees or all of any class or classes thereof determined by conditions pertaining to the employment or a combination of such conditions and conditions pertaining to the family status of the employee, for insurance coverage on each person insured based upon some plan which will preclude individual selection. . . . The premium for the policy shall be paid by the policyholder, either from the employer's funds, or from funds contributed by the insured employees, or from funds contributed jointly by the employer and employees. If all or part of the premium is to be derived from funds contributed by the insured employees, then such policy must insure not less than fifty percent of such eligible employees or, if less, fifty or more of such employees.

Insurance Law § 4235(d)(1), in turn, defines an “employee”:

In this section, for the purpose of insurance hereunder: ‘employees’ includes the officers, managers, employees and retired employees of the employer and of subsidiary or affiliated corporations of a corporate employer, and the individual proprietors, partners, employees and retired employees of affiliated individuals and firms controlled by the insured employer through stock ownership, contract or otherwise; ‘employees’ may be deemed to include the individual proprietor or

partners if the employer is an individual proprietor or a partnership; and ‘employees’ as used in subparagraph (A) of paragraph one of subsection (c) hereof may also include the directors of the employer and of subsidiary or affiliated corporations of a corporate employer.

Insurance Law § 3231(a) regulates policies issued by commercial health insurance companies. With respect to small groups, it provides:

No . . . group health insurance policy covering between two and fifty employees or members of the group exclusive of spouses and dependents, hereinafter referred to as a small group, providing hospital and/or medical benefits . . . shall be issued in this state unless such policy is community rated and, notwithstanding any other provisions of law, the underwriting of such policy involves no more than the imposition of a pre-existing condition limitation as permitted by this article. Any . . . small group, including all employees or group members and dependents of employees or members, applying for . . . small group health insurance coverage . . . must be accepted at all times throughout the year for any hospital and/or medical coverage offered by the insurer to . . . small groups in this state. . . . For the purposes of this section, "community rated" means a rating methodology in which the premium for all persons covered by a policy or contract form is the same based on the experience of the entire pool of risks covered by that policy or contract form without regard to age, sex, health status or occupation.

New York Insurance Law § 4317(a) (McKinney 2007), which regulates contracts of not-for-profit health insurers and all health maintenance organizations, sets forth identical requirements.

The inquirer draws an analogy, especially for tax purposes, between “members” of limited liability companies and partners in a partnership. While the analogy is not without its limitations, the Insurance Department has previously used that analogy to conclude that a “member” of a limited liability company may be licensed as an insurance agent or insurance broker. See Department’s Office of General Counsel Opinion of October 21, 2003. Accordingly, the Department is likewise comfortable in concluding that, a “member” of an LLC is an employee within the meaning of Insurance Law § 4235(c)(1)(A).

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.