We have a dormant account which was set up for a 'monthly meals' for those who would need it. Because of COVID, the account has not been used in 12 months, throwing it into a dormant state. The customer has contacted us, and provided a letter basically explaining why the account has not had any activity. We understand we can waive our dormant fee, but do we still leave it as dormant? And update our customer contact date? The customer has told us that other banks have accepted this. We are in a rural area, and I know for a fact that this organization provides meals in several counties.

How you classify a dormant account is a business decision. Written communication from the customer establishes a new last contact date.

In order to assess a dormancy charge, then you have a abide by all the State law requirements. It has to be specifically addressed in your depositor's contract.

Assuming you are actually in Michigan - see below:

567.227 Demand, savings, or matured time deposit.
Sec. 7.

(1) Any demand, savings, or matured time deposit with a banking or financial organization, including a deposit that is automatically renewable, and any funds paid toward the purchase of a share, a mutual investment certificate, or any other interest in a banking or financial organization is presumed abandoned unless the owner, within 3 years, has met 1 or more of the following requirements:
(a) In the case of a deposit, increased or decreased its amount or presented the passbook or other similar evidence of the deposit for the crediting of interest.
(b) Communicated, in writing, with the banking or financial organization concerning the property.
(c) Otherwise indicated an interest in the property as evidenced by a memorandum or other record on file prepared by an employee of the banking or financial organization.
(d) Owned other property to which subdivision (a), (b), or (c) applies and unless the banking or financial organization communicates, in writing, with the owner with regard to the property that would otherwise be presumed abandoned under this subsection at the address to which communications regarding the other property regularly are sent.
(e) Had another relationship with the banking or financial organization concerning which the owner has met 1 or more of the following requirements:
(i) Communicated, in writing, with the banking or financial organization.
(ii) Otherwise indicated an interest as evidenced by a memorandum or other record on file prepared by an employee of the banking or financial organization and unless the banking or financial organization communicates in writing with the owner with regard to the property that would otherwise be abandoned under this subsection at the address to which communications regarding the other relationship regularly are sent.
(2) For purposes of subsection (1), property includes interest and dividends.
(3) A holder may not impose with respect to property described in subsection (1) any charge due to dormancy or inactivity or cease payment of interest unless all of the following requirements are met:
(a) There is an enforceable written contract between the holder and the owner of the property providing that the holder may impose a charge or cease payment of interest.
(b) For the property of a value in excess of $2.00, the holder, no more than 3 months before the initial imposition of those charges or cessation of interest, has given written notice to the owner of the amount of those charges at the last known address of the owner stating that those charges will be imposed or that interest will cease. However, the notice required in this subdivision need not be given with respect to charges imposed or interest ceased before March 28, 1996.
(c) The holder regularly imposes such charges or ceases payment of interest and does not regularly reverse or otherwise cancel them or retroactively credit interest with respect to the property.

Thanks Randy. As always, I appreciate your help and knowledge.