Homeowners associations would do well to stay within the reserve funds FDIC limit. Doing so can help the community protect their funds and remain financially healthy. But, what exactly is this limit and is it truly important? Let’s find out.
What Is the FDIC?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government. It seeks to protect depositors’ funds in savings associations and banks by insuring a certain amount per depositor. If something happens to the bank or the money, the depositor can still claim their funds up to the FDIC’s limit. FDIC insurance is backed by the U.S. government and was established in 1933. Since then, no bank or savings association depositor has lost any FDIC-insured funds.
With that said, does FDIC insurance cover multiple accounts same bank? Yes, but it depends on the account type. FDIC insurance covers almost all deposit accounts and certain bank items, including the following:
- Savings accounts
- Checking accounts
- Time deposits like certificates of deposit (CDs)
- Money market deposit accounts (MMDA)
- Negotiable order of withdrawal (NOW) accounts
- Money orders, cashier’s checks, and other official bank-issued items
On the other hand, the FDIC does not cover other financial services and products that banks offer. These include:
- Mutual funds
- Bond investments
- Stock investments
- Annuities
- Life insurance policies
- Cryptocurrency assets
- Municipal Securities
- Safe deposit boxes and their contents
- U.S. Treasury notes, bills, and bonds
In addition, the U.S. government can only insure a certain amount. This is where the reserve funds FDIC limit becomes relevant for homeowners associations.
What Is the FDIC Limit of Reserve Funds for HOAs?
The standard FDIC-insured limit is $250,000 per depositor, per bank, and for every account ownership category. There are several FDIC ownership categories that the agency covers. Homeowners associations, whether incorporated or unincorporated, typically fall under the Corporation/Partnership/Unincorporated Association Accounts category. They have a reserve funds FDIC limit of $250,000 per Taxpayer Identification Number.
This means homeowners associations should not exceed $250,000 in any FDIC-insured bank, including the same bank’s branches. Moreover, all the accounts owned by the same association are combined. This means that HOAs cannot use multiple deposit account types to circumvent the limit. If the HOA exceeds the reserve funds FDIC limit, it may be noted in the independent auditor’s report.
Why Is Remaining Within the Reserve Funds FDIC Limit Important?
It’s important to stay within the limit because it’s the only way HOAs can protect their funds if a bank fails. For example, the HOA deposits $300,000 in an FDIC-insured bank. However, the bank suddenly goes bankrupt and can no longer give its depositors the money they owe. In this case, the HOA can only regain $250,000 from the FDIC. The remaining $50,000 is lost forever.
As a result, the homeowners association may not have enough money to cover unexpected expenditures. The HOA may have $250,000 to spare, but it might not be enough to pay for major expenses during a natural disaster or fire. Hence, the community may need to suddenly increase its monthly dues or levy large special assessments to cover the remaining costs.
In addition, losing the uninsured amount could jeopardize the HOA’s compliance with state law. Certain states require HOAs to follow the recommendations of their conducted reserve study. The HOA may face liability if the community’s reserve funds fall below the requirement.
How Can HOAs Maximize the Reserve Funds FDIC Limit?
Homeowners associations will have varying requirements regarding maintaining a reserve account, depending on state law and the governing documents. Regardless of the requirements, though, HOAs must keep the funds secure. As such, HOA boards should keep the funds safe in FDIC-insured banks. Some states may even require HOAs to keep the reserve funds within FDIC limits.
However, many homeowners’ associations choose not to abide by the FDIC’s limits because they are so restrictive. What if the community is large and maintains several amenities and elaborate facilities? The funding requirements would undoubtedly exceed the reserve funds FDIC limit. Of course, homeowners associations can choose to open multiple bank accounts to solve the problem. However, this method would be inconvenient, confusing, and prone to fraud as multiple bank accounts are more challenging to track.
Thankfully, there are ways homeowners associations can maximize the limit without handling multiple bank accounts. Here are some methods communities can consider.
CDARS
The IntraFi Certificate of Deposit Account Registry Service (CDARS) is a convenient program that allows associations to access FDIC insurance on CDs that exceed the $250,000 reserve funds FDIC limit. This program allows associations to place multi-million dollar deposits via a web of member banks.
Put simply, the CDARS program distributes the HOA’s funds across several CDs at various banks. However, what makes it convenient is that the HOA only needs to work with one bank for all CDARS transactions. Moreover, CDARS ensures that the HOA’s money does not exceed the FDIC limit per bank. This allows the HOA to deposit large amounts of money with FDIC protection.
ICS
The IntraFi Cash Service (ICS) allows associations to remain FDIC-insured even with deposits exceeding $250,000. However, unlike CDARS, ICS does not distribute the funds across several CDs. Instead, it deposits the HOA’s money into Demand Deposit Accounts (DDAs) placed into savings accounts at multiple banks within the ICS network. The savings accounts bear interest at a higher rate than traditional ones and remain FDIC-insured.
Wise Fund Management
Staying within the FDIC reserve funds limit is part of good financial management. Homeowners associations would do well to remain within the limit and invest the money wisely. To get the most out of this federal protection, HOAs should use programs like the ICS and CDARS. These allow planned communities to keep a larger amount in reserve funds while ensuring the money is safe.
Is your community having trouble with financial management? Look no further than Clark Simson Miller. We offer only the best remote HOA management services to condominium associations and homeowners associations. Contact us online or call us today at 865.315.7505 to request a proposal!
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