Q: We have a small, not-for-profit homeowners association (HOA). Can a nonprofit organization have a savings account or a CD?
A: Yes, nonprofit organizations can certainly have different types of bank accounts. The key to make the most of your not-for-profit status and get the best terms possible from the bank.
If your HOA has not already done so, you should apply to the Internal Revenue Service (IRS) for recognition of your entity's tax exempt status. This is usually done using IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.
Once your tax-exempt status is recognized, the organization should obtain an Employer Identification Number (EIN), even if it doesn't have any employees. This EIN serves as an identification number for tax purposes, which will be important when you set up a bank account.
You should make sure that any bank account owned by the homeowners association is identified as such by the association's EIN, so that any interest earnings in the account benefit from the association's tax-exempt status.
Even with tax-exempt status, it is likely your HOA will have to file an annual tax return. This is very important, because while it may not owe any taxes, the HOA is subject to IRS penalties if it fails to file a return. Also, if it fails to file for three consecutive years, the organization automatically loses its tax-exempt status.
When you set up bank accounts on behalf of the HOA, you should tightly control who in the organization has authorization to access those accounts. Also, there should be a system of record keeping and oversight to make sure funds are used exclusively for legitimate association business.
Finding the best banks for nonprofits
Once your HOA has established not-for-profit status, it should take steps to find the right type of bank account for organizations of its type. The following are some issues to consider:
- Savings, checking or both?
One nonprofit bank account may not be enough. If you are going to need frequent access to your money, a checking account is probably right. However, if you can put money aside for longer periods, a savings account for nonprofit organizations enables you to earn more interest. You may well find you have needs for both types of accounts.
- Checking account fees
While interest rates are the key characteristic when shopping for a savings account, most likely fees should be a primary criterion for choosing a checking account, especially monthly maintenance fees. The best banks for nonprofits often have low monthly fees.
- Longer commitments equal higher rates
If you have savings you don't need to access regularly, you will likely earn a higher rate of interest if you can commit the money for a fixed period of time in a certificate of deposit (CD) -- the longer the commitment, the higher the rate.
- Pay attention to balance requirements
If your account is likely to maintain a low balance or periodically draw funds down to low levels, check on the balance requirements of any account you consider. This can help make sure you receive a favorable interest rate and avoid additional fees.
- Compare rates and fees once you know your needs
Once you know the type of account you need and how you will use it, do some comparison shopping. In banking, one size does not fit all so the account terms being offered depend very much on the type and usage of the account.
- One bank may not meet all your not-for-profit banking needs
If you need one account for frequent transactions and another for longer-term savings, don't lock yourself into the notion that all your funds have to be with one bank. If these different needs are best met by different banks, then set your accounts up accordingly.
IRS filings and searching for the best banks for nonprofits may take you a little time up front, but ultimately it should help your homeowners association make the best use of its financial resources.