On May 29, 2013, the New York State Department of Health ("DOH") and 12 other State agencies published the highly anticipated final regulations limiting State funds for executive compensation to $199,000 a year as well as administrative expenses for Medicaid and other State-funded providers and managed care plans (the "Final Regulations"). A copy of the full text of the Final Regulations is available on the DOH web site. The publication of the Final Regulations ends the protracted rulemaking process that began with Governor Andrew Cuomo's issuance of Executive Order No. 38 on January 18, 2012.

The Final Regulations make only minor revisions to the proposed regulations (the "Proposed Regulations"), retain the same basic limits on executive compensation, and do not change the effective date (July 1, 2013) or the implementation date of the regulatory limits (for most providers, January 1, 2014). See Version 3 of the Proposed Regulations, discussed in our last Memorandum, sent March 28, 2013.1

Notable Changes in the Final Regulations

457 Plan Benefits, No Longer Excluded From "Executive Compensation".Version 3 of the Proposed Regulations had modified the definition of "executive compensation" subject to the regulatory limits so as to exclude "benefits such as health and life insurance premiums, and qualified retirement plan pension contributions (including 401, 403, 457(b) and 457(f) plans, and deferred compensation plans) that are consistent with those provided to the covered provider's other employees."2 (Emphasis added.) The Final Regulations delete the reference to 401, 403, 457(b) and 457(f) plans and provide more generally that "executive compensation" excludes "retirement and deferred compensation plan contributions that are consistent with those provided to the covered provider's other employees."3

Delegating Board Oversight to Compensation Committee, Acceptable.The Final Regulations clarify that, to secure the requisite governing body/Board approval of any level of executive compensation above $199,000 a year under the 75th percentile "safe harbor", the Board may delegate that responsibility to a "duly authorized compensation committee including at least two independent directors or voting members," provided that the Board reviews and ratifies the actions of the compensation committee.4 This modification brings the Final Regulations in line with compensation practices permitted under IRS guidance and the New York Not-for-Profit Corporation Law.

Robust FOIL Protection, Still Limited to Disclosure Form.Importantly, the Final Regulations, like Versions 3 and 4, only provide presumptive protection from public disclosure under the Freedom of Information Law for waiver applications (unless information on such applications has already been publicly disclosed),5 and do not expressly protect information submitted by the provider on its annual EO#38 Disclosure Form.

Outstanding Issues

In the Assessment of Public Comments released with the Final Regulations, the Department of Health reiterates the commentary accompanying Version 3, that it will provide guidance about acceptable comparability data or "safe harbor" compensation surveys sometime before the July 1 effective date. Providers should therefore closely monitor any developments in this regard. Otherwise, the latest Assessment of Public Comments provides no other guidance on the following, still outstanding issues:

  • exactly what types of government funding will be considered "State funds" or "State-authorized payments";6
  • what will be the format and content for the EO#38 Disclosure Form;7 and
  • what will be the format and content for waiver applications.8

Parallel Legislative Proposals

Several bills have been introduced in the current New York State legislative session ending June 20, 2013, that among other things address executive compensation paid by not-for-profit organizations:

  • Senate Bill 5197 / Assembly Bill 7338 (the "Executive Compensation Reform Act", amending the Not-for-Profit Corporation Law and the Estates, Powers and Trusts Law in relation to executive compensation oversight);
  • Senate Bill 5115 / Assembly Bill 2118 (amending the Executive Law and Not-for- Profit Corporation Law in relation to limiting executive compensation paid by public charities);
  • Senate Bill 3755 (amending the Not-for-Profit Corporation Law, among other laws, in relation to reforming governance of charitable organizations);
  • Senate Bill 4783 / Assembly Bill 2120 (amending the Executive Law and the Notfor- Profit Corporation Law, in relation to executive compensation of certain not-forprofit corporations); and
  • Assembly Bill 6616 (similar to Executive Order No. 38, among other things, authorizing limits on State reimbursement for executive compensation and administrative costs).

If any of these legislative proposals are adopted, then regulators and affected providers will have to grapple with reconciling the executive compensation limits imposed in the Final Regulations with the newly enacted statutory provisions relating to the same issue.

What Should Providers Be Doing Now?

Now that the regulations have been finalized, covered providers should review their compensation policies and practices to ensure that they incorporate the regulatory limits. Specifically, covered providers will need to assess whether compensation paid to any executives next year, beginning January 1, 2014, will likely exceed $199,000, and if so, whether such compensation would likely fall within the "safe harbor" or require a waiver. Notably, a waiver application can be filed as late as the deadline for filing the first enforcement-period disclosure form, in 2015. However, providers anticipating the need for a waiver would want to know whether or not a waiver will be granted before January 1, 2014, when the compensation covered by the waiver would be in place.

To that end, in developing a timeline for compliance with the Final Regulations, providers would need to work backwards from January 1st, to ensure that they have sufficient time to, for instance, develop compensation plans and identify potentially affected executives in 2014; retain outside compensation consultants and/or perform any necessary comparability studies supporting compensation above the $199,000 cap; present the compensation plans to the governing body/Board for review and approval, consistent with the criteria in the Final Regulations as well as IRS guidance; and (if necessary) prepare and file a waiver application and secure State approval of the waiver(s) prior to January 1st. Under the Final Regulations, DOH is allowed 60 days to review and determine a waiver application, unless it requests additional information, in which case it may extend the review period. Therefore, to be prudent, the latest that a provider should submit its waiver application for the 2014 enforcement period would be October 2013.

Finally, providers should review and if necessary revise their forms of contracts with agents and subcontractors subject to the Final Regulations, to ensure that the terms of the Final Regulations are incorporated in such agreements by January 1, 2014. In this regard, there is no "grandfather" protection for existing service contracts, so providers will need to review both existing and prospective agreements.


1 DOH alone issued a fourth revision of the Proposed Regulations on April 10, 2013 to specifically extend the Proposed Regulations' coverage to providers of early intervention services.

2 Proposed Regulations (Version 3) section 1002.1(g) of 10 N.Y.C.R.R.

3 Final Regulations section 1002.1(g) of 10 N.Y.C.R.R.

4 Final Regulations section 1002.3(b) of 10 N.Y.C.R.R.

5 Final Regulations section 1002.4(a)(5) of 10 N.Y.C.R.R.

6 Final Regulations section 1002.1(l) and (m) of 10 N.Y.C.R.R.

7 Assessment of Public Comments (Version 3), VI.

8 Assessment of Public Comments (Version 3), V.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.