FDIC Insurance- Protecting the Association’s Bank Deposits

By Jon H. Epsten

Throughout my entire career as a community association attorney, boards of directors and homeowners have asked me, ‘why can’t we invest association funds in the stock market or other uninsured cash investments?’ This is a particularly hot topic for those associations that have large sums of cash in the bank.

The answer is simple: the association’s money belongs to the non-profit organization, not to the individual directors. The board acts as a fiduciary when managing the association funds. While some debate the industry’s position in conservatively investing association cash accounts in certificates of deposits (CDs), the association’s fiduciary duty is to minimize the risk of loss of the funds and conserve principal. By placing the funds in insured (FDIC/NCUA/SIPC) or government backed securities, the accounts are backed by the U.S. Government. This investment strategy is low risk but oftentimes has low returns. California Civil Code section 5380 is not a model of clarity on investing and protecting the association’s deposits, but suggests that the standard of care or best practices is to place association cash in FDIC insured accounts or with a guarantee corporation.

There seems to be some confusion among boards and even financial advisors on what constitutes an insured FDIC deposit. The Federal Insurance Corporation states that deposits are insured up to a least $250,000 per depositor, per FDIC insured bank, per ownership category. Thus, the FDIC insures deposits according to the ownership category in which the funds are insured and how the accounts are titled. To obtain the full benefit of FDIC insurance, the association should only have one account at one bank with no more than $250,000 in the account.

Multiple accounts under the same association tax identification number at one bank do not afford additional insurance, as the insured cap is $250,000 per ownership category (different rules may apply to other types of deposits e.g., trusts). If your association has over $250,000 in any single financial institution, how do you protect the money? You have two options:

1) Open up accounts at different FDIC (or other insured) banks and maintain a balance of no more than $250,000 in each account; and/or

2) Contact your financial institution to explore establishing a “sweep account.”

With Option 1 above, for example, if the association has $1,000,000 it would open up bank accounts in at least four different FDIC insured banks, making the funds fully FDIC insured. Most associations that have large sums of money will maintain a balance under $250,000 in each bank to insure earned interest that accrues in the account is also protected.

What is a “sweep account?”

Generally speaking, it is a bank or brokerage account that automatically transfers amounts exceeding a certain level into an interest-earning account at the close of each business day.  This may or may not be the right option for your association, but it is worth considering.  We recommend you discuss this option with your financial advisor or tax preparer to confirm it is a good option for your association.

Consider these practice pointers:

1) Always check to make sure the financial institution(s) your association uses has insured deposits through the FDIC, NCUA or SIPC;

2) Consult with a financial advisor, banker and your management company for assistance in investing and protecting funds. Your attorney is not your financial advisor;

3) Consider “laddering” your CD accounts into different banks;

4) Review your governing documents to verify if there are any restrictions on investing in association funds; and

5) It is Not Your Money! The way you may invest your personal funds may not be suitable for a non-profit mutual benefit corporation to invest its funds.