Protecting an association’s finances starts with understanding how to properly manage HOA bank accounts. Boards must keep separate accounts for funds, establish clear access controls, and reconcile statements regularly. Doing so can help safeguard the association’s funds.
Are HOA Bank Accounts Necessary?
In general, it is recommended for HOAs and condominiums to open and maintain bank accounts.
While it is possible to function without a bank account, especially for smaller communities, there are several drawbacks to the practice. For one thing, it increases the risk of fraud within the association. Without a bank account, boards can’t track funds either in real time or through a paper trail.
Additionally, it will be harder to separate operating funds from reserve funds. Simply storing hard cash in drawers or boxes increases the risk of mixing up the accounts. A bank account also earns interest, which isn’t possible if the HOA keeps all of its money in a safe.
Other than that, managing dues collection and vendor payments becomes a chore. Board members would have to collect fees by going door-to-door or by asking owners to mail in cash. While money is more liquid this way, it is more difficult to keep track of disbursements.
How Many Bank Accounts Should an HOA Have?
While an association’s governing documents typically dictate the number of bank accounts, it is best practice to keep two: an operating account and a reserve account.
Operating Account
The operating account is essentially an HOA checking account that the board uses for day-to-day or recurring expenses. These include landscaping, routine maintenance, utilities, insurance, and management fees.
This account is primarily funded through owner dues. Special assessments, when imposed, are also typically deposited into this account unless they are intended to fund reserves. Other deposits include fines, late fees, and interest charges.
Reserve Account
The reserve account stores the association’s reserve funds. It acts as a savings account, covering the cost of major repairs and replacements in the future.
In general, an HOA should only use the reserves for their intended purpose. During the declarant control period, Section 82.112 of the Texas Uniform Condominium Act prohibits using reserve funds to pay operating expenses. Similar provisions exist in most associations’ governing documents even after declarant control ends.
How to Set up an HOA Bank Account
Associations must select the right bank to suit their needs, choose the account type(s) they wish to open, and then establish strict access controls. Here’s how to set up a bank account for an HOA.
1. Choose the Right Bank
First, board members must choose a bank that specifically caters to HOAs or similar communities. Look for features such as online payment methods, reserve investment options, and FDIC insurance. The bank must also have a good reputation and reliable customer support.
Some experts recommend that smaller associations go for credit unions. Many credit unions waive their monthly fees or minimum balances for nonprofit corporations.
Today, online banking services are highly sought after, too. Digital access allows for real-time monitoring, convenient payments, and transfers with just a few clicks. But cybercrimes are a real threat, so make sure to choose a bank with robust encryption and security protocols.
2. Select the Type of Account
Associations must open at least two bank accounts: an operating account and a reserve account. Most operating accounts are checking accounts. Meanwhile, a reserve account can either be a savings account or a high-yield deposit account.
3. Establish Controls
Internal checks and balances minimize financial misconduct and instances of fraud. Here are the most common practices for establishing controls:
- Require at least two authorized signatures for large expenditures or withdrawals,
- Set a threshold for withdrawals that don’t require board approval,
- Assign every director a separate login for online banking access,
- Segregate duties to keep directors accountable for each other, and
- Reconcile bank statements every month.
What are the Requirements for Opening a Bank Account for an HOA?
While exact requirements vary, most banks ask for an ID, a copy of the association’s governing documents, a signed board resolution, and information on authorized signers.
- Employer Identification Number (EIN). This is the federal tax ID of the homeowners association or condominium.
- Governing Documents. Banks ask boards to provide copies of their CC&Rs and bylaws. These documents prove that the association exists and outline the community’s rules.
- Board Resolution. A signed resolution must be presented to show who is authorized to manage the bank account.
- Signer Information. Board members who will be listed as authorized signers must provide their government IDs.
Banks will also typically ask the HOA to complete a form with all pertinent details. Once processed, the association will receive its bank account number(s), checkbook (if any), and debit or ATM card (if any).
Who Should be on an HOA Bank Account?
Generally, the people whose names should appear on the HOA’s bank account are those authorized to access it, typically the current board members or select officers.
That said, the association’s governing documents are often more specific about account access and authority. In practice, it is best to give access to all board members. This allows them to monitor transactions and keep each other in check.
The HOA treasurer is usually responsible for managing the association’s bank account. Of course, this does not mean that they should have sole access. Instead, they act as the point person for account management, payment processing, and deposits.
For large expenditures or withdrawals, it is recommended to have at least two authorized signers. This prevents a single person from having too much control over the HOA’s money.
Who Has Access to HOA Bank Account?
When a management company assists with HOA banking, the board should retain ultimate control over the association’s finances.
Many associations hire professional management services. While managers generally oversee day-to-day finances, from collecting dues to disbursing payments, they shouldn’t have unrestricted authority to spend association funds.
One key control is to require board approval for certain expenditures or withdrawals over a particular amount. Managers can spend money up to a fixed dollar amount, but anything beyond that requires authorization.
It is also not a good idea to give managers unbridled access to the HOA bank accounts. Limit their actions to basic banking tasks, with no real control over permissions or transfers between accounts. This prevents fraud, theft, and commingling.
Finally, board members must review bank reconciliations and statements regularly. Never rely on the management company’s reports alone. Double-check all the figures to ensure accuracy.
A Wise Decision
Managing HOA bank accounts can be tricky without the proper experience or guidance. It can be easy to lose control over the association’s funds and plunge the community into debt. Fortunately, choosing a bank with secure systems and establishing internal checks and balances will help protect the HOA’s funds.
PAMco offers exceptional HOA financial services to communities in Central Texas. Call us today at 512-918-8100 or contact us online to learn more!
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