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November 2, 2012

Revised New York State Executive Compensation Rules Released

Last May, 13 state agencies proposed regulations to implement Executive Order 38, issued by Governor Andrew Cuomo on January 18, 2012. The proposed regulations would govern the use of State funds and State-authorized payments in connection with providing certain services to individuals. Our Legal Alert "Cuomo's Rules Target High Earning Executives of Health Care and Human Services Providers" discusses the proposed regulations. The state agencies reviewed comments and have revised the proposed regulations, released October 31, 2012. The implementation date of the regulations has been changed to April 1, 2013.

The basic concepts in the proposed regulations remain: 1) unless a provider obtains a waiver, neither a covered provider or related entity (that term has been revised, see the below) shall use state funds or state-authorized payments for executive compensation greater than $199,000.00 per annum; and 2) a covered provider is also required to use at least 75% of its State funds for program activities rather than administration (a figure which will increase over time). In response to suggestions submitted, changes were made to the definitions of the following terms: administrative expenses, covered provider, covered executive, executive compensation, program services expenses, related entity, State-authorized payments and State funds.

The regulations have been changed to recognize existing executive compensation until 2014, where the compensation was agreed to before April 1, 2012. Agreements with Covered Executives entered into prior to April 1, 2012 will not be subject to the executive compensation limits during the term of the contract, except that Covered Providers must apply for a waiver for any contracts or agreements with Covered Executives for executive compensation that exceeds or otherwise fails to comply with the regulation if such contracts or agreements extend beyond April 1, 2014.

There were some changes to the regulations including making it clear that personnel training to facilitate service delivery, information technology and computer services and systems directly attributable to program services (including electronic records systems used to improve care or documentation of services) and quality assurance and control expenses were program, rather than administrative, expenses. The regulation always stated that legal expenses needed to accomplish a program service objective are program services expenses, but it has been changed to specifically exclude from administrative expenses those expenses over $10,000 that are non-recurring or unanticipated, such as unanticipated litigation related expenses.

Of some confusion to providers was the use of the term "related entity" in the proposed regulations, which has now been revised to "related organization" and has been defined using the definition of the same term in Schedule R of the Internal Revenue Service's Form 990, except that for purposes of this regulation, a related organization must have received or be anticipated to receive State funds or State-authorized payments from a Covered Provider during the reporting period.

One interesting comment made was that the 75th percentile restriction will drive salaries down as the large pool of outliers reduces salaries in order to comply with the regulation which will eventually depress the maximum salary permitted under the regulations. As the commenter said, "Unless all executive compensation above the 75th percentile is granted a waiver, the 75th percentile limit will, over time, cause executive salaries that were at or near the 75th percentile to be at or near the 100th percentile." The response was that the agencies anticipate that they will assess the impact on salaries, if any, on an ongoing basis and will make any necessary adjustments to the regulations accordingly.

Recent presentations regarding the regulations seemed to indicate that enforcement would involve selective enforcement as opposed to an aggressive systems-wide enforcement of the regulations and that a "fairly robust waiver process" was anticipated. Guidance documents before the implementation date are expected, including a disclosure form that each Covered Provider will need to complete and submit to comply with these regulations.

Hiscock & Barclay is carefully analyzing the regulations to assist its clients in the specific application of the regulations to their organizations. Please contact Melissa M. Zambri, Chair of the Health Care and Human Services Practice Area, David P. Glasel, Chair Emeritus, or Charles Feldman for more information.


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