Segregating Reserve funds

If the HOA has a reserve fund that is part of the monthly assessment, can the money collected be invested in a CD with other regular assessment funds. For example, our monthly assessment is $60 per month and of that, the reserve account (in the accounting system) is credited for $10 of the $60. The books show the total income of 60, 10 of which is booked to the reserve and the other 50 is left to pay for other expenses. However, at this time, 20 of the 50 is not need so the treasurer buys a CD. In the CD he puts the 20 from the excess income AND the 10 from the reserve account. Not considering how to figure out what should happen to the interest income on the CD, is it legal to co-mingle reserve funds and regular funds in the CD?

I found this statement on a website referenced in a recent forum, but forgot who the author is.

"The HOA should maintain a separate bank account which is used for the deposit of these reserve assessments. The bank account should be considered the HOA’s "reserve" fund for capital expenditures. This procedure is necessary because the IRS requires that reserve assessments cannot be commingled with regular assessments if the reserve assessments are to be considered nontaxable contributed capital. While it appears that the IRS should not be concerned with an organization's banking arrangements, present IRS revenue rulings nevertheless make this requirement."

If this is true, can anyone point to a more specific reference? Does it really make any difference?

Robert:

An HOA should have an operating account and we have a separate account for each HOA in a "reserve" account. How we set it up is the money is placed in a money market accruing interest in the name of the HOA. Depending on how much money the HOA has in reserves, if it is enough a percentage is left liquid in the money market. The rest the board at their discretion places increments of anywhere 1K to 5K staggering them into CD's of 3mos-6mos-9mos-1 yr to 2 year of course depending on the % it yields in interest.

We have some HOA's with a larger amount in their operating enough to maintain what the bank calls a "sweep account." These HOA's enjoy a monthly interest of approx. $350.00 each and every month on their operating account and approximately $295.00 on their reserve account bringing just in interest alone on an annual basis $7,740.00 for the HOA.

I would speak to your MC and bank representitive to the many options available to invest your funds safely in a secured FDIC facility.

I don't think I am making my question clear. I am not asking about how to invest any of the funds, that is not an issue.

All I am asking about is about taking some or all of the reserve funds and combining them with excess assets income and buying 1 CD. My reference states this is against some IRS policy. I am trying to find out if this is true.

RobertG:
I understand your question. However, you state you want to take 'some' or all of the reserve funds and 'combine' with 'excess income' to buy a CD. Hopefully, your capital expense fund has been already set up for some time, realizing a nice $ amount and now you want to ADD SOME OVERFLOW MONEY to the capital fund and purchase a CD with the combined amount. As long as you understand that the CD is geared now ONLY for Capital Expenses. Once you put overflow monies or any other monies into the capital expense fund, it becomes money for Capital Expenses only.

I would caution you that if you feel you have 'excess income' midway through the year (June) and you want to take the excess now, you may be acting prematurely and by year end, you may come up short on operating income required to cover all expenses.

It is a definite no-no to use operating funds for capital expenses--hence the reason for two entirely separate funds. You can refer to your state Planned Community Act or Condo Act for particulars.

Hope this helps.