SBA Proposes Sweeping Overhaul of 8(a) Rules SBA wants to allow 8(a) firms to pay higher salaries. That is one of many changes in the first comprehensive overhaul of 8(a) rules in more than a decade. The explanation of the proposed rules, published in the Oct. 28 Federal Register, runs 34,000 words. SBA asked for comments by Dec. 28. Changes affecting Alaska Native and other tribally-owned businesses are covered in a separate story.. SBA Administrator Karen Mills said the proposed changes “will strengthen the program and maximize its benefits for eligible small businesses.” SBA does not plan to raise the ceilings on net worth of 8(a) business owners, as many advocates had urged. An applicant for 8(a) certification may have a net worth no greater than $250,000 and the owner of a participating 8(a) firm may not have a net worth over $750,000. An SBA spokeswoman told Set-Aside Alert the average net worth of a business owner entering the 8(a) program is $70,000, not counting the owner’s equity in the business and primary residence. She said 90% of American families have a net worth below $250,000. “Given this, SBA believes the current net worth limitations are reasonable,” the statement said. However, the agency is proposing several changes that would ease restrictions on an 8(a) owner’s income and wealth. One proposed rule relaxes the definition of “excessive withdrawals,” which may get a company kicked out of the 8(a) program. Currently if the total income of all company officers exceeds $300,000 a year, it is considered an excessive withdrawal. SBA proposes to ignore officers’ salaries when calculating whether a withdrawal is excessive. The proposed rule would authorize SBA to look at “the totality of the circumstances” to make sure a company was not finagling to get around the excessive withdrawal rules. The rule also limits an owner’s annual income to $250,000 a year for continued 8(a) eligibility. The proposed rule increases the threshold amount for a withdrawal to be considered excessive. For companies with sales less than $1 million an excessive withdrawal would be more than $200,000 instead of the present $150,000. For firms with sales between $1 million and $2 million, the threshold would be $250,000 instead of $200,000; and for those with sales over $2 million the excessive withdrawal amount would be $400,000 instead of $300,000. SBA said its rules are designed to ensure that business owners don’t “cash out.” But it said the current limitations on withdrawals may prevent companies from paying competitive salaries and limit their business discretion. Under another proposed change, SBA will presume that a person is not economically disadvantaged if his or her adjusted gross income at the time of an 8(a) application is more than $200,000 or if the fair market value of assets exceeds $3 million. Currently the limit is the income of the top 2% of wage earners as measured by IRS statistics. SBA says it believes a dollar figure is more appropriate. An individual may rebut a finding that he is not economically disadvantaged by showing that the high income was the result of an unusual event, such as an inheritance, or that the income came from gambling winnings that were offset by gambling losses. In determining whether a business owner is economically disadvantaged, SBA will no longer apply community property definitions. Property owned solely by one spouse will not be counted as part of the other spouse’s assets. Individual Retirement Accounts (IRAs) and other official retirement accounts will not be used in calculating a business owner’s net worth. Other proposed changes: •The 8(a) partner in a mentor-protégé joint venture must perform at least 40% of the work done by the joint venture. For example, if the JV performs 50% of the work, the 8(a) partner must perform 40% of that 50%, or 20% of the total contract. The current rule says the 8(a) firm must perform “a significant portion” of the work. (Details in the “Joint Venture” story, p.1.) •An 8(a) partner in a JV should receive profits in proportion to its share of the work—for example, 40% of the profit for 40% of the work. Currently the 8(a) partner must receive 51% of the JV profits. SBA said that is unfair to the larger JV partner. •Contracting officers may reserve task orders on multiple award contracts for 8(a) firms. •All 8(a) companies must report semiannually instead of annually the compensation paid to any agents or other outside parties who assist in obtaining a federal contract. •Audited financial statements will be required from companies with gross receipts over $10 million, rather than the current $5 million. SBA said the purpose is to reduce costs for smaller firms. •An 8(a) firm may change its primary NAICS code if the mix of its business changes. This rule also clarifies the definition of the term “regularly maintains an office.” •An 8(a) firm must remain small in its primary NAICS code for as long as it stays in the program. Currently if a firm outgrows the size standard for its primary NAICS code, it is allowed to stay in the program as long as it remains small in secondary NAICS codes. That would be prohibited under the proposed rule. •A mentor in the 8(a) mentor-protégé program would be limited to three protégés. Mentor-protégé joint ventures would be considered small businesses for subcontracts as well as prime contracts. Protégés would be allowed to have more than one mentor in certain circumstances, such as when the second mentor operates in a different NAICS code than the first one. No 8(a) firm could serve as a mentor and a protégé at the same time. •Members of an 8(a) participant’s immediate family would be permitted to own other 8(a) companies as long as they are in a different industry, the family member is qualified to run the company, and the family member can show that his company is separate and independent. The current rule prohibits family members from owning more than 20% of another 8(a) firm. SBA said it believes “this narrow exception” is justified and will only apply to a few companies. •The disadvantaged manager of an 8(a) company must live in the United States and spend part of each month physically present at the company’s principal place of business. SBA said that notwithstanding the convenience of telecommuting, the disadvantaged manager must be present part of the time to ensure that he or she is actually running the company. The agency asked for specific comments on what, if any, minimum number of hours the manager should be required to spend in the office. •If an 8(a) participant is called to active duty in the armed forces, he or she could designate someone else to run the company temporarily. Alternatively, the business owner could suspend participation in the 8(a) program during the active-duty period without penalty. •A firm that completes its nine-year term as an 8(a) business does not necessarily graduate. A participating firm graduates only if it successfully completes the program, as determined by SBA. Other changes are proposed in rules regarding graduation and termination. •An agency that awards an 8(a) contract is responsible for oversight of the contractor, including its compliance with 8(a) rules. This clarification responds to criticism by the Government Accountability Office that the lines of responsibility for oversight were blurry. Changes to size regulations •Change and rewrite definitions of mentor/protégé programs. •Allow 8(a) joint ventures to receive up to three contracts within two years. Current rules limit those JVs to bidding on three contracts. Partners in the joint venture would be allowed to form new JVs after they have been awarded three contracts, but SBA warns that they may run afoul of affiliation rules because JVs are supposed to be short-term arrangements. •Clarify affiliation rules for 8(a) mentor/protégé teams who form joint ventures. •Procurements of supplies must be classified according to the appropriate manufacturing NAICS code and cannot be classified under a retail trade NAICS code. •Clarify the application of the nonmanufacturer rule. •Give SBA’s Office of Inspector General the authority to ask for a formal size determination.