Payments under Federal financial assistance awards fall into two broad categories: (1) payments to State recipients, and (2) payments to all other recipients. 


This information applies to:

All grants and cooperative agreements


Contents

Overview


State recipients

States follow their Treasury-State Agreement (sometimes referred to as a Treasury-State Cash Management Improvement Act Agreement), or TSA, for major Federal programs listed in the agreement. The purpose of the TSA is to outline how a State (1) disburses Federal funds, and (2) calculates interest on those funds prior to disbursement.[1] Under its TSA, a State receives Federal financial assistance award payments in advance of cash outlays with the understanding they will disburse those funds according to the criteria established in the agreement.

For those Federal programs not listed as major in a State's TSA, the State follows the default procedures in Subpart B—Rules Applicable to Federal Assistance Programs Not Included in a Treasury-State Agreement [2], which directs State recipients to draw-down and disburse Federal financial assistance award funds in anticipation of immediate cash needs of the State for work under the award.[3] The language in Subpart B is very similar to the Uniform Guidance requirements for advance payments to non-State recipients.[4] 

To summarize, for State recipients of Federal financial assistance, awards, the default payment method is often referred to as 'advance payment'. An advance payment is the draw-down of Federal award funds by the recipient in anticipation of “immediate cash requirements” in paying allowable direct and indirect costs for work under the Federal award. The time-frame for “immediate” is not quantified; rather, it is based on the recipient's financial system and written procedures. The intent is to minimize the amount of Federal interest the recipient may earn on drawn funds, which could, if unchecked, result in the need for the recipient to repay the Federal government for that interest.

Non-State recipients

Non-State recipients receive payments from Federal financial assistance awards via three possible methods: (1) Advance; (2) Reimbursement; and, (3) Working Capital. Advance payments are mandatory for non-State Federal financial assistance award recipients who meet certain criteria under the Uniform Guidance. Reimbursement is the appropriate payment method when the criteria for advance payment cannot be met; or, past performance history of the recipient results in a specific condition on the Federal award to reimburse only (formerly "high risk" designation); or, the recipient requests reimbursement as the payment method. It may also be used on construction projects. The working capital payment method addresses those Federal financial assistance award recipients who cannot meet the criteria for advance payments, nor have sufficient funds to make a cash outlay first before drawing down Federal funds (i.e., reimbursement).

Payments to recipients of Federal financial assistance awards are meant to be made in a manner that makes those funds available for immediate use on award activities. For recipients in good standing, access to those funds should be appropriately accessible to minimize delays in completing the work. The chief concern is interest earned on advance payments prior to disbursement by the recipient, which is limited by the Uniform Guidance.

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Authorities


2 CFR 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards

§200.305 Payment.

(a) For states, payments are governed by Treasury-State CMIA agreements and default procedures codified at 31 CFR Part 205 “Rules and Procedures for Efficient Federal-State Funds Transfers” and TFM 4A-2000 Overall Disbursing Rules for All Federal Agencies.

(b) 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. See also §200.302 Financial management paragraph (b)(6). Except as noted elsewhere in this part, Federal agencies must require recipients to use only OMB-approved standard governmentwide information collection requests to request payment.

(1) The non-Federal entity must be paid in advance, provided it maintains or demonstrates the willingness to maintain both written procedures that minimize the time elapsing between the transfer of funds and disbursement by the non-Federal entity, and financial management systems that meet the standards for fund control and accountability as established in this part. Advance payments to a non-Federal entity must be limited to the minimum amounts needed and be timed to be in accordance with the actual, immediate cash requirements of the non-Federal entity in carrying out the purpose of the approved program or project. The timing and amount of advance payments must be as close as is administratively feasible to the actual disbursements by the non-Federal entity for direct program or project costs and the proportionate share of any allowable indirect costs. The non-Federal entity must make timely payment to contractors in accordance with the contract provisions.

(2) Whenever possible, advance payments must be consolidated to cover anticipated cash needs for all Federal awards made by the Federal awarding agency to the recipient.

(i) Advance payment mechanisms include, but are not limited to, Treasury check and electronic funds transfer and must comply with applicable guidance in 31 CFR part 208.

(ii) Non-Federal entities must be authorized to submit requests for advance payments and reimbursements at least monthly when electronic fund transfers are not used, and as often as they like when electronic transfers are used, in accordance with the provisions of the Electronic Fund Transfer Act (15 U.S.C. 1693-1693r).

(3) Reimbursement is the preferred method when the requirements in paragraph (b) cannot be met, when the Federal awarding agency sets a specific condition per §200.207 Specific conditions, or when the non-Federal entity requests payment by reimbursement. This method may be used on any Federal award for construction, or if the major portion of the construction project is accomplished through private market financing or Federal loans, and the Federal award constitutes a minor portion of the project. When the reimbursement method is used, the Federal awarding agency or pass-through entity must make payment within 30 calendar days after receipt of the billing, unless the Federal awarding agency or pass-through entity reasonably believes the request to be improper.

(4) If the non-Federal entity cannot meet the criteria for advance payments and the Federal awarding agency or pass-through entity has determined that reimbursement is not feasible because the non-Federal entity lacks sufficient working capital, the Federal awarding agency or pass-through entity may provide cash on a working capital advance basis. Under this procedure, the Federal awarding agency or pass-through entity must advance cash payments to the non-Federal entity to cover its estimated disbursement needs for an initial period generally geared to the non-Federal entity's disbursing cycle. Thereafter, the Federal awarding agency or pass-through entity must reimburse the non-Federal entity for its actual cash disbursements. Use of the working capital advance method of payment requires that the pass-through entity provide timely advance payments to any subrecipients in order to meet the subrecipient's actual cash disbursements. The working capital advance method of payment must not be used by the pass-through entity if the reason for using this method is the unwillingness or inability of the pass-through entity to provide timely advance payments to the subrecipient to meet the subrecipient's actual cash disbursements.

(5) Use of resources before requesting cash advance payments. To the extent available, the non-Federal entity must disburse funds available from program income (including repayments to a revolving fund), rebates, refunds, contract settlements, audit recoveries, and interest earned on such funds before requesting additional cash payments.

(6) Unless otherwise required by Federal statutes, payments for allowable costs by non-Federal entities must not be withheld at any time during the period of performance unless the conditions of §§200.207 Specific conditions, Subpart D—Post Federal Award Requirements of this part, 200.338 Remedies for Noncompliance, or one or more of the following applies:

(i) The non-Federal entity has failed to comply with the project objectives, Federal statutes, regulations, or the terms and conditions of the Federal award.

(ii) The non-Federal entity is delinquent in a debt to the United States as defined in OMB Guidance A-129, “Policies for Federal Credit Programs and Non-Tax Receivables.” Under such conditions, the Federal awarding agency or pass-through entity may, upon reasonable notice, inform the non-Federal entity that payments must not be made for obligations incurred after a specified date until the conditions are corrected or the indebtedness to the Federal Government is liquidated.

(iii) A payment withheld for failure to comply with Federal award conditions, but without suspension of the Federal award, must be released to the non-Federal entity upon subsequent compliance. When a Federal award is suspended, payment adjustments will be made in accordance with §200.342 Effects of suspension and termination.

(iv) A payment must not be made to a non-Federal entity for amounts that are withheld by the non-Federal entity from payment to contractors to assure satisfactory completion of work. A payment must be made when the non-Federal entity actually disburses the withheld funds to the contractors or to escrow accounts established to assure satisfactory completion of work.

(7) Standards governing the use of banks and other institutions as depositories of advance payments under Federal awards are as follows.

(i) The Federal awarding agency and pass-through entity must not require separate depository accounts for funds provided to a non-Federal entity or establish any eligibility requirements for depositories for funds provided to the non-Federal entity. However, the non-Federal entity must be able to account for the receipt, obligation and expenditure of funds.

(ii) Advance payments of Federal funds must be deposited and maintained in insured accounts whenever possible.

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

(i) The non-Federal entity receives less than $120,000 in Federal awards per year.

(ii) The best reasonably available interest-bearing account would not be expected to earn interest in excess of $500 per year on Federal cash balances.

(iii) 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.

(iv) A foreign government or banking system prohibits or precludes interest bearing accounts.

(9) Interest earned amounts up to $500 per year may be retained by the non-Federal entity for administrative expense. Any additional interest earned on Federal advance payments deposited in interest-bearing accounts must be remitted annually to the Department of Health and Human Services Payment Management System (PMS) through an electronic medium using either Automated Clearing House (ACH) network or a Fedwire Funds Service payment. Remittances must include pertinent information of the payee and nature of payment in the memo area (often referred to as “addenda records” by Financial Institutions) as that will assist in the timely posting of interest earned on federal funds. Pertinent details include the Payee Account Number (PAN) if the payment originated from PMS, or Agency information if the payment originated from ASAP, NSF or another federal agency payment system. 

[78 FR 78608, Dec. 26, 2013, as amended at 79 FR 75883, Dec. 19, 2014; 80 FR 54408, Sept. 10, 2015]

The Council on Financial Assistance Reform’s (COFAR) Frequently Asked Questions on 2 CFR 200 (July 2017 update)

200.305
.305-1 Application of 200.305(b) advance payments to payments by States

Q: Does 200.305(b), including the requirement to consider advance payments to subrecipients, apply to States?

A: No, requirements for states are provided at 200.305(a) “For states, payments are governed by Treasury-State CMIA agreements and default procedures codified at 31 CFR Part 205 “Rules and Procedures for Efficient Federal-State Funds Transfers” and TFM 4A-2000 Overall Disbursing Rules for All Federal Agencies.”

.305-2 Payments to Non-Federal Entities – Advance or Reimbursement?

Q: Is the intent of §200.305(b)(1) to convert all non-Federal entities, including those that are currently on a cash reimbursement basis, to an advance payment basis for the transfer of funds and disbursements, even if the non-Federal entity has not requested that its funding method be changed?

A: No. The intent of §200.305(b)(1) is to ensure that if a non-Federal entity requests an advance payment method, the Federal agency must approve this request only if the non-Federal entity maintains financial management systems that meet the standards for fund control and accountability in this section.

The advance payment method is the default payment method, provided the non-Federal entity minimizes the time elapsing between the transfer of funds and disbursement and meets the standards for internal controls and accountability. The Federal awarding agency or the non-Federal entity may switch to reimbursement when:

1) the non-Federal entity cannot meet the advance payment requirements of §200.305 (b);

2) the Federal awarding agency imposes an award condition requiring reimbursements based on an assessment of risk or as a remedy for noncompliance; or,

3) the non-Federal entity requests payment by reimbursement.

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Frequently Asked Questions


Does FWS have a policy on payments for Federal financial assistance awards?

Yes. 516 FW 4—Payment Management for Grant and Cooperative Agreement Awards can be found here.

What are the criteria under the Uniform Guidance for advance payment to non-State Federal award recipients?

According to 2 CFR 200.305(b), non-State recipients must be paid using the advance method, provided they maintain:

  1. Written procedures that detail how they will minimize the time between draw-down and disbursement of the Federal funds on award activities (cf. §200.302(b)(6)). 
  2. A financial management system that meets fund control and accountability standards established in the Uniform Guidance (cf. §200.302(b)).

The Service assesses the recipient's financial management system, to include its written payment procedures, during the risk assessment process. 

How long may a recipient hold Federal payments from Federal financial assistance awards before disbursing (i.e. advance payments)?

Federal regulations use the term "actual, immediate cash requirements", which is understood to be as close to a same day transaction as feasibly possible. This means that on the day the Federal payment is credited to the recipient's account, the recipient should pay out those Federal funds for Federal program purposes.

Are advance payments subject to the "three-day rule"?

Technically, no, since the three-day rule incorrectly attempts to establish a deadline for advance payment timing (i.e. for immediate cash needs) on Federal financial assistance awards, although this 'rule'  is not found in any Federal regulation pertaining to Federal financial assistance. Thompson Grants, a well-known company offering a variety of products and training on Federal financial assistance, published a brief article on this rule a few years ago.[5] In short, Thompson's states that the three-day rule comes from a misapplication of the instructions for the SF-425, which directs recipients to disclose to the Federal awarding agency any excess Federal cash-on-hand that the recipient has not expended within three business days.  

When must a recipient repay interest earned on advance payment funds from Federal awards?

It varies slightly, depending on recipient type, though the principle is the same. States follow their Treasury-State Agreement for major programs, and Subpart B for all other Federal programs. Non-State recipients who earn interest in excess of $500 per year must return that excess interest to the Federal government annually. Amounts up to $500 may be retained by the recipient for administrative expenses (§200.305(b)(9)). 

What are the requirements for State pass-through entities paying their non-State subrecipients?

While 2 CFR 200 does not speak to this directly, it is addressed in the Uniform Guidance FAQs published by the Council on Financial Assistance Reform (COFAR). 

200.305
.305-1 Application of 200.305(b) advance payments to payments by States
Question: Does 200.305(b), including the requirement to consider advance payments to subrecipients, apply to States?

Answer: No, requirements for states are provided at 200.305(a) “For states, payments are governed by Treasury-State CMIA agreements and default procedures codified at 31 CFR Part 205 “Rules and Procedures for Efficient Federal-State Funds Transfers” and TFM 4A-2000 Overall Disbursing Rules for All Federal Agencies.”

The question asks if States are to follow the requirements for non-State recipients when determining if advance payment can be made to their subrecipient. COFAR's response is that States don't follow these criteria; they follow their own Treasury-State Agreement. This would include payments to their subrecipients using the advance method.

Can subrecipients be paid using the advance payment method?

Yes. See the FAQ above. 

Remember, payment requirements (for State and non-State recipients) are chiefly concerned with interest earned on Federal funds. This holds true even when the award is tiered down. It's all about the timing between disbursement and outlay. Additionally, it is also important to note that, in the COFAR's answer, they do not attempt to correct any misunderstanding about subrecipients being eligible to be paid via the advance method. They clarify that 200.305(b) does not apply to State recipients (even when the State is a pass-through entity). When there is the need to correct a misunderstanding, even when not the central point of a question, the COFAR typically does. They don't here.

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Learning Aids


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Related Pages


FA Wiki blog post, Payments under Federal Financial Assistance (June 2018)

Payments to Financial Assistance Recipients (Systems)

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Resources


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References


[1] 31 CFR §205.6 What is a Treasury-State agreement? (https://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=cb97ae172a0a04802dcd9ee212f510ae&mc=true&n=pt31.2.205&r=PART&ty=HTML#se31.2.205_16)

[2] Subpart B of 31 CFR §205 can be viewed at https://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=cb97ae172a0a04802dcd9ee212f510ae&mc=true&n=pt31.2.205&r=PART&ty=HTML#sp31.2.205.b. 

[3] 31 CFR §205.33, "A State must minimize the time between the drawdown of Federal funds from the Federal government and their disbursement for Federal program purposes. A Federal Program Agency must limit a funds transfer to a State to the minimum amounts needed by the State and must time the disbursement to be in accord with the actual, immediate cash requirements of the State in carrying out a Federal assistance program or project. The timing and amount of funds transfers must be as close as is administratively feasible to a State's actual cash outlay for direct program costs and the proportionate share of any allowable indirect costs. States should exercise sound cash management in funds transfers to subgrantees in accordance with OMB Circular A-102 (For availability, see 5 CFR 1310.3.)."

[4] 2 CFR §200.305(b): 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.

[5] Thompson Grants, The Truth Behind the Three-Day Rule. February 9, 2011. http://fundingattractions.blogs.thompson.com/2011/02/09/the-truth-behind-the-three-day-rule/

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