SBA is coming for your 8(a) certification: What targeted firms need to know

If your firm participates in the 8(a) business development program, you need to pay attention. The Small Business Administration recently initiated proceedings to terminate 154 Washington, D.C.-based firms from the program. According to the SBA, these firms do not meet the program’s eligibility requirements for economic disadvantage.

The SBA’s recent enforcement action is part of a broader campaign to scrutinize the 8(a) program, which began late last year when the agency issued broad demands for records from more than 4,300 program participants. In the coming weeks, the SBA is likely to initiate termination proceedings against more firms across the country.

The targeted firms will receive a Letter of Intent to Terminate outlining the reasons for their ineligibility. This is not a final determination. Firms have 30 days to respond to the SBA explaining why a termination is unjustified. 

Any firm under threat of termination should rapidly assess the SBA’s findings to determine if there are flaws in its analysis. Given the speed and scale of the SBA’s review, it is likely – if not inevitable – that there will be miscalculations that impact at least some of the targeted firms. A well-supported response that identifies errors in the SBA’s analysis can prevent a termination before it becomes final.

Where SBA’s Calculations May Be Wrong

To meet 8(a) program requirements, the owner of the firm cannot exceed certain thresholds for personal net worth ($850,000), average adjusted gross income over three years ($400,000), and fair market value of total assets ($6.5 million). An individual owner’s failure to meet any of these requirements could be grounds for the SBA to determine that the firm is not “economically disadvantaged.”

Importantly, however, determining whether an individual meets these requirements is not a purely mathematical exercise. The regulations allow for certain exclusions, meaning a raw number is not necessarily the correct figure to use when making an eligibility finding.

Moreover, the threshold calculations include asset values that may differ substantially depending on the valuation method used. The complexity of the regulations and the careful judgment needed to apply exclusions and value assets create ample opportunities for mistakes or findings based on faulty opinions. 

Although there are a variety of areas where the SBA’s findings could be wrong, firms should pay particular attention to the following issues:

Failing to exclude the owner’s equity in the 8(a) firm from net worth. The regulations require SBA to exclude the individual’s ownership interest in the 8(a) firm when calculating net worth.  If SBA included the owner’s equity in the company, the net worth figure would be inflated.

Failing to exclude primary residence equity from net worth.  SBA must also exclude equity in the owner’s primary personal residence, except to the extent that equity is attributable to excessive withdrawals from the firm.  If home equity was included without a finding of excessive withdrawals, the calculation would be wrong.

Failing to exclude retirement account funds. Funds invested in an Individual Retirement Account (IRA) or other official retirement accounts are excluded from both net worth and total assets.  If the SBA counted these balances, those figures should not have been included.

Miscalculating average adjusted gross income. The owner may exclude income reinvested in the firm or used to pay taxes for the business. An unusually high distribution in one year that was reinvested into the business could skew the average if the SBA failed to apply this exclusion. In addition, the SBA may have failed to properly exclude income received by the owner of an S corporation, limited liability company, or partnership that is used to pay taxes. 

Inflating the fair market value of assets.  Unlike the net worth calculation, the value of the 8(a) business and the owner’s primary residence are not excluded from the total asset calculation. If the SBA relied on book value, outdated appraisals, or an inflated estimate of the business or residence, the total asset figure may overstate the owner’s actual financial position. Owners should be prepared to submit current, independent valuations to challenge any inflated SBA valuations.

Improperly attributing a spouse’s financial information.  SBA may consider a spouse’s finances only where the spouse has a role in the business or has lent money to, provided credit support to, or guaranteed a loan of the business.  If SBA attributes a spouse’s assets or income without establishing one of these conditions, the calculation is improper.

The Right to Appeal

After the 30-day period, the SBA will review any response submitted by the firm and determine if termination is warranted.  If SBA proceeds with a termination, it will send a written notice to the impacted firm that includes the specific facts and reasons for the decision.

The firm may appeal that decision to the SBA’s Office of Hearings and Appeals (OHA) within 45 days.  The appeal must demonstrate that SBA’s determination was arbitrary, capricious, or contrary to law.

OHA’s administrative law judges have explicit authority to remand cases for a new determination where SBA made an erroneous factual finding or a mistake of law in applying the regulations.  Given the volume of firms under review and the complexity of the calculations, these are not hypothetical concerns.

The record for OHA to review on appeal is generally limited to the documents and information submitted to the SBA during the initial 30-day response period.  Firms typically cannot supplement the record on appeal.  It is therefore critically important for targeted firms to act quickly to gather and submit all documents and information needed to support an eligibility determination in the initial response.

In addition to initiating termination proceedings, the SBA is also suspending the targeted firms in parallel. Firms that have been suspended must separately appeal the suspension to OHA within 45 days.  OHA may eventually consolidate the suspension and termination proceedings when the issues overlap. 

It is important to note that even firms that are terminated or suspended from the 8(a) program should continue to perform their existing 8(a) contracts unless the awarding agency separately decides to terminate those contracts.

The Bottom Line

SBA’s recent actions reflect the most aggressive review of the 8(a) program in its history. But the regulations provide meaningful protections for firms willing to challenge flawed findings and legal errors in the SBA’s eligibility assessment.  The key is to act within the deadlines, scrutinize the SBA’s calculations, and preserve your right to appeal.

Stephen L. Bacon is a shareholder in the Washington, D.C. office of the law firm Rogers Joseph O’Donnell, PC, where he represents government contractors in bid protests, claims, terminations, investigations, and suspension and debarment proceedings. He frequently litigates cases at the U.S. Court of Federal Claims, the Government Accountability Office, the Boards of Contract Appeals, and the Small Business Administration’s Office of Hearings and Appeals. He also provides advice and counsel to clients on a broad range of contractual and regulatory compliance issues that confront government contractors.

The views expressed in this article are those of the author and do not necessarily reflect the views of Rogers Joseph O’Donnell or its clients. This article is for general information purposes and is not intended to be and should not be construed as legal advice.