Past approvals do not guarantee continued eligibility as SBA examines participant financial status.
The SBA announced its suspension of 154 8(a) Participants from the 8(a) Business Development Program for failure to meet the Program’s “economic disadvantage” eligibility requirements. While it is crucial to understand the difference between a suspension from the 8(a) Program and a general suspension under FAR Part 9, this post examines the various 8(a) Program requirements for demonstrating “economic disadvantage” and continued eligibility for participation in the Program. Furthermore, although these issues are reported to the SBA as part of Participants’ annual reviews, and presumably reviewed by the SBA annually as well, we are aware that SBA is re-examining 8(a) annual reviews and taking adverse action against 8(a) Participants.
Put differently, even where the SBA “approved” or otherwise permitted eligibility in the past based on 8(a) annual reviews, reliance on those previous actions or inactions by the SBA will not protect Participants moving forward.
“Compliance doesn’t change,” says Anna Sanders, Director of Certification and Eligibility at GCP. “Even firms in good standing can face suspension if they no longer meet the program’s financial requirements.”
The 8(a) income and asset test is a critical component of the SBA’s 8(a) Business Development Program. It ensures that applicants and 8(a) participants are economically disadvantaged, and that only those with the most to gain from the 8(a) Program maintain eligibility. The test includes:
- Net Worth (13 CFR 124.104(c)(2)): The individual upon whom eligibility for 8(a) is based must maintain net worth below $850,000. Exclusions include the value of qualified retirement accounts, ownership interest in the applicant firm or 8(a) Participant, and equity in one’s primary personal residence. These valuations, especially for ownership interests in the Participant and the value of a primary residence can be tricky to navigate, and GCP’s recommends carefully reviewing these items in preparing an annual review response
- Personal Income (13 CFR 124.104(c)(3)): The individual upon whom eligibility for 8(a) is based must maintain a three-year-averaged adjusted gross income (AGI) of less than $400,000. This excludes pass-through income from LLCs, or S-Corps, if reinvested into the business (and sufficient documentation supporting the proposed exclusion is provided). To determine AGI, 8(a) Participants should review their Form 1040, line 11, their W2, and distributions, if any, to determine modified 8(a) AGI. Withdrawals for personal use are not excluded.
- Total Assets (13 CFR 124.104(c)(4)): The fair market value of all individual assets of the individual upon whom eligibility for 8(a) is based must be less than $6.5 million, excluding qualified retirement accounts. This includes ownership interest in the applicant firm or 8(a) Participant and equity in one’s primary residence. As with Personal Income, the Total Asset valuation can pose challenges, and GCP recommends carefully reviewing these items.
- Excessive Withdrawals (13 CFR 124.112(d)): For companies with sales exceeding $2 million, owners cannot withdraw more than $400,000. Lower thresholds apply for companies with less than $2 million in sales. Withdrawals include retirement contributions, rent paid to affiliate companies, and personal use withdrawals. Salaries are generally excluded from the excessive withdrawal limitations, however, SBA may include salaries as withdrawals if it believes that the 8(a) Participant is attempting to circumvent these limitations. Crucially here, as with Personal Income, documenting any distributions as well as their utilization is crucial to preserving eligibility.
Full Video Below.
These tests are essential for maintaining eligibility in the 8(a) Program and can impact the financial planning and management of businesses participating in the Program.
GCP wishes to remind 8(a) Participants that the suspension standards are relatively high, and that affected Participants have 45 days to appeal these suspensions to the SBA’s Office of Hearings and Appeals.
For assistance with preparing, or even a review of your already completed annual reviews, please contact GCP.
