The Path to Compliance Part Three: Cash Management Considerations of Federal Awards

Federal grants can be a key part of a nonprofit’s funding and operations. However, many financial professionals struggle to understand and apply the various compliance requirements the federal government imposes on grant recipients. This is the third installment in a series of articles that provides practical guidance to assist nonprofits with federal grant compliance.

The primary source document for these requirements is the Uniform Grant Guidance (UGG). A copy of the UGG can be found on the eCFR website.

This month’s installment was originally going to continue the discussion of subrecipient considerations. However, with the ongoing increases in the interest rates that can be earned on deposit accounts, along with headlines regarding bank failures, it’s a good time to review the basic cash management requirements of federal awards.

§200.305(b) of the UGG contains the main cash management requirements for nonprofit entities. (Nonprofits should also be aware that §200.302(b)(6) of the UGG requires federal award recipients to have written procedures to implement the requirements described in §200.305.)

In general, the concepts discussed in §200.305(b) are reasonably straightforward and can be contextualized using the three overarching concepts discussed below.

1. Cash received from federal awards should be put to use for program purposes as quickly as possible.

The very first sentence of §200.305(b) states:

For non-Federal entities other than states, payments methods must minimize the time elapsing between the transfer of funds from the United States Treasury or the pass-through entity and the disbursement by the non-Federal entity whether the payment is made by electronic funds transfer, or issuance or redemption of checks, warrants, or payment by other means.

The idea is that nonprofits should not just sit on federal cash for unnecessarily long periods. Federal awards are meant to achieve programmatic outputs, so they should be used as quickly as feasible. Along these lines, §200.305(b)(5) of the UGG requires award recipients to first utilize program income generated from federal programs to pay for program costs before requesting additional funds from the federal government.

In general, advances received from the federal government should be designed to meet the immediate cash needs of the nonprofit to conduct the federal program. Nonprofits should document the basis, or calculation, used for each drawdown request to show that the amount requested was not in excess of immediate cash needs. When in doubt, it can be helpful to discuss the timing of advance payments with the federal contract officer to ensure there is no misunderstanding about cash requirements.

2. Cash received from federal awards should be properly safeguarded with minimal risk of loss.

§200.305(b)(7)(ii) of the UGG states, “Advance payments of Federal funds must be deposited and maintained in insured accounts whenever possible.” This simple sentence makes it clear that recipients of federal awards within the United States should work with their banks to determine the best arrangement to ensure that federal cash balances are covered by federal deposit insurance to the greatest extent feasible. This section also effectively eliminates the ability to park federal funds in investment securities. The ultimate goal is to ensure that federal funds are free from the risk of loss while waiting to be utilized for program purposes.

But, as stated in UGG §200.305(b)(7)(i), there is no requirement for an award recipient to establish a separate bank account to maintain federal funds. The key thing is that the award recipient must be able to account for how federal funds are received and disbursed. Some nonprofit organizations elect to use a separate bank account for federal funds, but this is not mandated.

3. Award recipients should not deploy federal cash balances to generate interest or investment income for their own use.

As noted earlier, rising rates mean that nonprofit entities can now generate significant interest income on cash deposits. Thus, it is critical that federal award recipients be aware of the following requirements as stated in §200.305(b)(8) of the UGG:

(8) The non-Federal entity must maintain advance payments of Federal awards in interest-bearing accounts, unless the following apply:

1. The non-Federal entity receives less than $250,000 in Federal awards per year.
2. The best reasonably available interest-bearing account would not be expected to earn interest in excess of $500 per year on Federal cash balances.
3. The depository would require an average or minimum balance so high that it would not be feasible within the expected Federal and non-Federal cash resources.
4. A foreign government or banking system prohibits or precludes interest-bearing accounts.

§200.305(b)(9) of the UGG specifies that an award recipient may retain interest earned on federal funds up to $500 per year. Any interest earnings in excess of $500 must be remitted to the federal government.

§200.305(b)(9), (10), and (11) of the UGG provide detailed guidance on how to return funds to the federal government.

Conclusion

In conclusion, nonprofits should remember that the cash management requirements related to federal awards are critical to their overall compliance efforts. Nonprofits should not be using federal cash to make a profit or provide working capital for non-federal programs. Federal funds should be safeguarded and put to their intended use as quickly as possible.

Read Other Articles from the Series

• The Path to Compliance, Part One: Procurements Using Federal Funds
• The Path to Compliance, Part Two: Identifying Subrecipients of Federal Funds
• The Path to Compliance Part Three: Cash Management Considerations of Federal Awards
• The Path to Compliance Part Four: The Schedule of Expenditures of Federal Awards (SEFA)