Is the management company required to keep separate bank accounts for Reserve Funds vs Working Funds?

ANSWERS:

The answer is most likely dependent on the terms of the association’s bylaws. Most modern bylaws require that reserve funds be maintained in a separate account from the operating (working) fund. You should review your bylaws to determine if that is the case. Even if, in the unlikely event, the bylaws do not require the reserve funds to be segregated, there is no reason that the governing board could not make it a policy of the association to require segregation of the reserve funds, with which the management company would then be obligated to comply. It is clearly prudent to maintain the reserve funds separately from the operating funds so that the reserves do not become a “piggy bank” to fund cash flow problems in the operating account without the board taking formal action to authorize a temporary transfer of funds from reserve to operating to cover a short term deficit. Further, in many associations the reserve funds can be considerable. The board and management company should be confirming that the total in the operating and reserve funds in any one bank does not exceed the FDIC insurance limit of $250,000. Frequently, reserves are invested in certificates of deposit with various banking institutions so this is not an issue. But we have seen circumstances where the total in the two accounts – and the FDIC rules aggregate all funds on deposit for any single depositor in determining whether the $250,000 limit has been surpassed – do exceed the limit by a considerable amount, thereby putting the excess at an unnecessary risk.

J. David Ramsey
Becker & Poliakoff
67 Park Place, Suite 702
Morristown, NJ 07960
Tel: 973.898.6502
Fax: 973.898.6506
DRamsey@bplegal.com

There is no requirement that they be kept separate. However separate books must be kept with details as to what goes into and out of each. It is just easier if separate accounts are kept.

Sara A. Austin
Austin Law Firm LLC
226 E. Market St.
York, PA 17403
717.846.2246 phone
717.846.2248 fax
saustin@austinlawllc.com

Definitely such would be considered a “preferred practice,” because, otherwise, it would be difficult, in the event of monthly operating shortfalls, to not spend the “reserve” funds on normal operating expenses.
Obviously, the purpose of establishing a “reserve” fund is so that such will be available in the event of an emergency or to be used to replace capital improvements at the end of such items beneficial useful life, not to pay normal operating expenses.

Nelson Mullins 
Patrick O’Dea 
BNC Bank Corporate Center, Suite 300 
Myrtle Beach SC 29577 
(843) 946-5631 
patrick.odea@nelsonmullins.com 
http://www.nelsonmullins.com

The answer to this question likely varies depending on state law and the requirements of the Association’s governing documents. In Minnesota, the law states, as follows:

515B.3-1141 REPLACEMENT RESERVES.
(3) The association shall keep the replacement reserves in an account or accounts separate from the association’s operating funds, and shall not use or borrow from the replacement reserves to fund the association’s operating expenses, provided that this restriction shall not affect the association’s authority to pledge the replacement reserves as security for a loan to the association.

So, in our state, the replacement reserves must be keep in a separate account. However, this is not a national law and the requirements vary from state to state.

David G. Hellmuth
Attorney at Law
P: (952) 746-2107
F:  (952) 941-2337
dhellmuth@hjlawfirm.com
8050 West 78th Street 
Edina, MN 55439

As reserve funds are dedicated to a specific purpose it makes good fiscal sense to segregate those funds in a separate account to avoid any misuse for general operating expenses.

Kenneth D. Roth, Esq.
Marchetti Law, P.C.
900 N.Kings Highway, Suite 306
Cherry Hill, NJ 08034
kroth@marchettilawfirm.com
Tel: 856-824-1001
Fax: 267-219-4838

Most By-Laws require that reserve funds be kept in separate accounts. Even if the By-Laws do not, reserve funds must be separated out into their own account. The rules that govern accounting for non-profit associations designate funds charged to unit owners in excess of that which is needed to run the day-to-day business of the Association “profit,” unless the excess funds constitute “reserve funds” for future replacement. In order to have a reserve fund that functions in the way the IRS and the State Treasury Department expect to see it, it would have to be held in a separate account. Failure to do so could jeopardize the Corporation’s non-profit status.

Griffin Alexander, P.C.
Robert C. Griffin, Esq.
415 Route 10 
2nd Floor
Randolph NJ 07869-2100
(973) 366-1188
rgriffin@lawgapc.com