What’s a Document Retention Policy, and Why Do Your Nonprofit Clients Need One?

It’s not unusual for a nonprofit to toss papers and documents they no longer need. However, when a staff person or volunteer presses delete on a key document, or if the subject of the document is under a legal investigation and the organization has failed to retain it, there can be trouble.

The good news? Your nonprofit clients can avoid these issues by developing a document retention policy.

What is a document retention policy?

A document retention (and destruction) policy outlines how staff, volunteers, and board members should store and dispose of a nonprofit’s documents and records. This policy ensures that records are kept for the right amount of time and destroyed when no longer needed. It’s also part of the governance policies that the IRS highlights on Form 990, which asks if the nonprofit has a written policy for record retention.

According to the National Council for Nonprofits (NCN), a document retention policy is “simply a record of what types of documents the organization must retain and for how long. It should also specify that the nonprofit will adhere to a regular business practice of document destruction.”

No universal regulation currently provides a comprehensive guideline for creating a document retention policy. Since state laws vary, each organization must be aware of and comply with its specific state requirements concerning document retention, storage, and destruction. However, there are records that the NCN suggests should be permanently retained. They include:

• Articles of incorporation
• Audit reports from independent audits
• Corporate resolutions
• Determination letters from the IRS
• Year-end financial statements
• Insurance policies
• Minutes of board meetings and annual meetings of members
• Real estate deeds, mortgages and bills of sale
• Tax returns
• Checks

Best practices for effective document retention include the following:

• Maintaining a list of documents to be permanently retained While a document retention policy allows staff to dispose of certain documents on a set schedule, it’s essential to consider if there are specific types of documents (or individual documents) that should be kept permanently for historical or institutional memory purposes. NOTE – Remember that a document retention policy also applies to documents stored in the cloud or on a server, including emails. If using digital storage, a backup plan should be in place.
• Understanding state laws Laws related to employment, including those governing payroll, vary by state and will often impact document retention policies.
• Knowing how long to retain records related to minors Nonprofits serving minor children may need to retain certain records at least until the child reaches majority age, plus the time allowed by the state statute of limitations for the now-adult to bring a claim against the organization.
• Consulting with a professional A tax adviser or accounting firm that prepares the nonprofit’s annual federal tax returns is an excellent resource to determine which documents may be needed during an IRS audit and how long they should be retained.
• Including a preamble of intent for the board of directors According to the Minnesota Council of Nonprofits’ Principles and Practices for Nonprofit Excellence, adopting a document retention policy sets guidelines, promotes transparency, and aids the board of directors in fulfilling their duty of care.?

Suppose an issue arises that involves allegations of mismanagement or failure to comply with legal/regulatory requirements related to document retention. In that case, the board will likely have coverage in their Directors & Officers liability insurance policy under the contract’s wrongful acts provision, making this coverage vital.

Implementing a document retention and destruction policy is crucial for nonprofit organizations. It not only ensures compliance with legal requirements but also enhances transparency and accountability of staff, volunteers, and the board of directors. By systematically managing documents, nonprofits can protect sensitive information, preserve important records, and demonstrate their commitment to ethical practices – all while supporting the organization’s mission and building trust with stakeholders.

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Disclaimer: Information in this blog is for informational purposes only and is not intended to be and should not be construed as legal, accounting, tax, investment, or financial advice. Please consult a professional (attorney, accountant, tax adviser) for the latest and most accurate information.