Recently, the New York State Department of Health (DOH) and other state agencies (the Department) published final regulations establishing limits on administrative expenses and executive compensation for covered providers that receive state funding. These regulations implement New York Governor Andrew Cuomo's Executive Order No. 38, which was issued on January 18, 2012. They finalize several sets of proposed regulations that were issued following the Executive Order, and are substantially similar to the latest version of the proposed regulations. This update discusses the executive compensation restrictions set out in the final regulations.

The final regulations prohibit covered providers from using state funds or state-authorized payments to provide more than $199,000 per year in executive compensation directly or indirectly to a covered executive. This limit becomes effective on July 1, 2013 and will apply to each covered provider on the first day of its next reporting period. Therefore, if a covered provider's reporting period is the calendar year, the limit will apply beginning on January 1, 2014.

In general, the regulations define covered providers as entities or individuals (whether for-profit or not-for-profit):

The DOH regulations contain an exclusive list of the facilities and entities that are covered providers. Certain types of providers are also excluded from the definition of covered provider.

The limit applies to executive compensation paid to covered executives. The regulations define covered executive as a compensated director, trustee, managing partner, officer or key employee whose:

The terms "director," "trustee," "officer," and "key employee" have the same meaning as those terms are defined in the instructions for IRS Form 990, Part VII. If the covered provider has more than ten key employees as defined by the regulations, the covered provider must report only the ten key employees with the highest level of executive compensation during the reporting period. Under certain circumstances, the covered executives of related organizations are considered covered executives under the regulations.

Executive compensation is defined broadly to include all forms of cash and noncash payments or benefits given directly or indirectly to a covered executive, including but not limited to:

Under the regulations, executive compensation does not include mandated benefits (such as Social Security, worker's compensation, unemployment insurance and short-term disability insurance), and other benefits such as health and life insurance premiums and retirement and deferred compensation plan contributions that are consistent with those provided to the covered provider's other employees.

The $199,000 annual limit on executive compensation does not apply to reimbursement with state funds or state-authorized payments for a covered executive's reasonable compensation for program services rendered by the executive outside of his managerial or policy-making duties, including supervisory services to facilitate the covered provider's program services (generally services by a covered provider for the benefit of the public that are paid by state funds or state-authorized funds).

The covered provider must maintain documentation of the program services performed by the executive and provide it to the Department on request.

A covered provider will be subject to penalties if its executive compensation to a covered executive exceeds $199,000 per year (including all sources of funding, not only state funds and state-authorized payments) and the compensation either:

A covered provider may choose to pay a covered executive more than $199,000 from other sources if the compensation satisfies a safe harbor whereby the compensation is both:

The limit on executive compensation also applies to:

When a contract or grant of state funds or payments is subject to more stringent limits than provided in the final regulations, the more stringent limits apply and are not affected by the less stringent limits in the regulations.

Under a grandfathering provision in the regulations, the limit on executive compensation does not apply to any contract or agreement with a covered executive agreed to before July 1, 2012, except that:

Covered providers may seek a waiver from the limits on executive compensation provided by the final regulations:

Covered providers must submit a waiver application form no later than concurrent with the submission of its EO#38 Disclosure Form. Since the EO#38 Form can be submitted 180 days after the close of the reporting period, a waiver can be requested after the period to which it applies. However, where possible, covered providers should submit their waiver applications before the applicable period.

The following factors are considered by the Department when processing waiver applications:

A waiver of the $199,000 limit will be granted only if the provider demonstrates good cause for a waiver and provides any documentation requested by the Department. Normally, a decision on a timely submitted waiver application is provided no later than 60 calendar days after submission of the application.

Granted waivers will remain in effect for the period of time specified by the state for the covered executive position at issue, but will be deemed revoked when either:

The information provided by a covered provider in a waiver application is not subject to public disclosure under the New York State Freedom of Information Law.

Covered providers must submit a complete EO#38 Disclosure Form for each covered reporting period. The regulations define covered reporting period as the provider's most recently completed annual reporting period, commencing on or after July 1, 2013. Reporting period means, at the provider's option, the calendar year or, where applicable, the fiscal year used by a provider. If a provider must file an annual cost report with the state, its reporting period will be the reporting period applicable to the cost report.

The form must be submitted no later than 180 calendar days after the covered reporting period, unless otherwise authorized. Covered providers must also provide any other information requested by the Department at any time during the term of or before the execution of any contract or agreement with the provider.

Covered providers that receive state funds or state-authorized payments from county or local governments or an entity contracting on their behalf must report directly to the Department. County and local governments are not responsible for receiving or forwarding these reports to the Department.

A covered provider that fails to submit a completed EO#38 Disclosure Form or provide additional or clarifying information at the request of the Department may lose its contract or agreement for state funds or state-authorized payments.

Covered providers that do not comply with the regulations and do not obtain a waiver will be notified, in writing, of the state's determination that they are not in compliance and the basis for that determination. This notice will give the covered provider an opportunity and a procedure to submit additional or clarifying information within 30 calendar days of the provider's receipt of the notice, to demonstrate compliance with the regulations.

If a covered provider fails to submit additional or clarifying information within the required time period, or if it does submit the information but the Department determines that it is still not in compliance with the regulations, the non-compliance determination will become final, and the provider will receive notice of that determination and a notice to cure.

Within 30 calendar days of receiving the notice, the covered provider must submit a corrective action plan (CAP) for approval by the Department. Within 30 days of receiving the CAP, the Department will either approve the CAP or request clarification or alterations. The covered provider must make all reasonably requested alterations to its CAP.

Once the CAP has been approved by the Department and the covered provider notified, and unless otherwise provided in the approved CAP, the covered provider will have six months to complete the CAP and comply with the regulations before additional enforcement action or penalties are imposed. If the Department or its designee determines that the CAP has been implemented, the matter will be closed. But if the Department determines that the CAP has not been implemented within the corrective action period, the Department may take one or more of the following actions:

The final regulations take effect on July 1, 2013 and the limit applies beginning on the first day of a covered provider's next reporting period.

Persons and entities that receive state funds should carefully consider whether they are a covered provider under the final regulations. Entities that meet the definition should review their executive compensation policies and practices before the effective date to ensure that their programs incorporate the $199,000 limit. If their executive compensation programs provide for annual payments to any covered executives in excess of $199,000, they should consider whether the compensation may fall within the safe harbor or whether a waiver will be needed. Covered providers should watch for guidance on acceptable comparability data or compensation surveys that should be issued before the July 1 effective date.