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Executive Order 38 - What You Need to Know

When Executive Order 38 was issued by Governor Cuomo, many providers receiving New York State funds had concerns on how the regulation would affect their executives as well as their entity. Below is a summary of key items that entities receiving New York State funding should be aware of: Background and General information Executive Order 38, Limits on State-Funded Administrative Costs and Executive Compensation was released in its final version in May 2013 and is effective beginning July 1, 2013. The purpose of Executive Order 38 (EO 38) is to prevent public funds from being diverted for excessive compensation and unnecessary administrative costs by limiting compensation for executives of entities (both for-profit and not-for-profit) to $199,000. EO 38 is applicable to entities receiving over $500,000 in New York State funds and whose funding is at least 30% from New York State during the year. Executives covered under EO 38 include individual directors, trustees, managing partners, officers, key employees and individuals employed by related organizations whose overall compensation exceeded $199,000 during a reporting period (one year). An executive can be paid more than $199,000 with non-state funds if their compensation is within the 75th percentile of comparable executives and certain other criteria are met. EO 38 limits the number of executive salaries that are required to meet the salary threshold to only the top 10 highest compensated executives. In addition, EO 38 requires applicable entities to have no less than 75% program service expenses and no more than 25% administrative expenses in their first reporting period under the regulation. The ratio of program expenses to administrative expenses increases each year for two years reaching a maximum ratio of 85% program service expenses and 15% administrative expenses. Effective Dates for EO 38 For calendar year Medicaid cost report filing entities (entities with December 31 year-ends), the first annual enforcement period for EO 38 will be the period from January 1, 2014 to December 31, 2014. For this period, an EO 38 Disclosure Form will be required to be completed by a provider with the filing of their 2014 Medicaid cost report in 2015. Penalties for Non Compliance The penalties for non-compliance are fairly severe. Potential penalties include the revocation of an entitys license, redirection of State funds, termination of State contracts or any lawful action or penalties deemed appropriate. Providers will be given an opportunity to provide clarifying information to cure a violation prior to receiving penalties for non compliance. Waivers An executive can be compensated over the $199,000 limit with New York State funds if they receive a waiver from the Department of Health and the Department of Budget. In accordance with EO 38, a waiver application would need to be filed for each executive above

Christopher McCarthy Partner cmccarthy@odpkf.com 914.341.7018

Keith Solomon Partner ksolomon@odpkf.com 914.341.7078

Dorothea Russo Partner drusso@odpkf.com 914.341.7087

John Cosgrove Partner jcosgrove@opdkf.com 914.341.7010

the limit (limited to 10 executives). The waiver may be filed before or after the reporting period the waiver applies to, but no later than the submission date of the EO 38 Disclosure Form. Legal Challenges In September 2013, a lawsuit was filed in the Supreme Court of Albany County by the New York State Health Facilities Association, New York State Center for Assisted Living, Leading Age, Southern New York Association, Greater New York Healthcare Facilities Association, Empire State Association of Assisted Living, the Home Care Association of New York State, and over 170 individual member providers challenging EO 38. The results and timing of this litigation will be critical, as the EO 38 Disclosure Form as well as any waivers will be required to be completed no later than the filing of the 2014 Medicaid cost report and EO 38 Disclosure Form in 2015. Other Thoughts on EO 38 EO 38 has sparked many questions, including how the order applies to executives who serve more than one entity or how the sources of funding that are being paid to executives will be determined. Final guidelines to answer these and other questions are expected to be issued in June 2014. Until these guidelines are issued, it would be prudent to review the funding sources and applicability of EO 38 to your entity. In addition, entities should review their compliance with existing IRS executive compensations provisions which are currently in effect. For more information on what your facility can do to prepare for Executive Order 38, please contact Christopher J. McCarthy [cmccarthy@odpkf.com], Keith Solomon [ksolomon@odpkf.com], Dorothea Russo [drusso@odpkf.com] or John Cosgrove [jcosgrove@odpkf.com].
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