Back to Basics: 8(a) Program Economic Disadvantage

When it comes to SBA’s many small business socioeconomic certification programs, the 8(a) Business Development Program is often considered SBA’s “golden child”–as its potential benefits are nearly endless. But it certainly wouldn’t be a “golden child” at all if just anyone could get into it. The 8(a) Program has some of the most extensive and strict requirements out there. In this post, we’ll dig into the basic components of one of those requirements: economic disadvantage. But don’t fret, this post is worth a read for our experienced 8(a)-ers and those just learning about the program. For the former, the information below can serve as a refresher on the basics of economic disadvantage–but also, a source for SBA’s most recent economic disadvantage thresholds (as of 2024, as these are updated periodically for inflation). For the latter, we suggest reviewing these basics of economic disadvantage along with our other Back to Basics blogs on the 8(a) Program (this one discussing the program, generally, and this one discussing all the rules for eligibility).

What does it mean to be “economically disadvantaged” in the context of 8(a) generally?

As you may already know, or may have read about in the other blogs linked above, SBA’s rules for basic 8(a) eligibility require the applicants to be unconditionally owned and controlled by one or more individuals who are both socially and economically disadvantaged. According to SBA, an economically disadvantaged individual is simply a socially disadvantaged individual “whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged.”

Per SBA:

In considering diminished capital and credit opportunities, SBA will examine factors relating to the personal financial condition of any individual claiming disadvantaged status, including income for the past three years (including bonuses and the value of company stock received in lieu of cash), personal net worth, and the fair market value of all assets, whether encumbered or not. An individual who exceeds any one of the thresholds set forth in this paragraph for personal income, net worth or total assets will generally be deemed to have access to credit and capital and not economically disadvantaged.

Now, again, economic disadvantage is just one of several financial/economic based requirements for the 8(a) Program; but it is unique in that economic disadvantage looks at finances of the disadvantaged individual owner(s)/manager(s) who will be qualifying the applicant/participant company for the program (not the finances of the applicant/participant company itself). And this is important to keep in mind as we run through the three thresholds that make up this 8(a) requirement, as it gives rise to some common confusion our experience assisting with the 8(a) Program.

What are SBA’s current economic disadvantage thresholds?

SBA’s economic disadvantage regulation (found at 13 C.F.R. § 124.204) lays out the “cut-offs” or maximum thresholds for the three different areas of an individual’s finance that SBA will assess. And these are an all or nothing package-deal. SBA will reject an applicant (or graduate/terminate a current participant) if any of its individual owners/managers upon whom eligibility is based fall above any of these three thresholds while applying to or participating in the 8(a) Program. But SBA is not unreasonable when it comes to the constantly changing economy we live in; so, as we’ve written about previously, these thresholds are reevaluated periodically, with the most recent increase occurring in 2022 to account for inflation.

First, the disadvantaged individual’s personal net worth must be less than $850,000. This “adjusted net worth” calculation, as we like to call it, excludes a few things, though, including: (1) the individual’s equity in the applicant/participant company; (2) their personal residence; and (3) any investments they hold in an IRA or other retirement account. Notably, one’s equity in their own company may depend on how specifically that company and its finances are valued. So, while this threshold (like the other two) looks at the individual’s finances, there is a crucial interplay with the company’s own finances to keep in mind, as some applicants/participants are able to find different valuations of the company and its assets from different sources.

Second, the individual’s personal income must not exceed $400,000 per year when averaged over the three years preceding the application (or the time of the reevaluation, for current participants). In general, if one exceeds this threshold, SBA will presume the individual is not economically disadvantaged. But take note of SBA’s specific language here; this threshold is a bit different than the other two discussed in this post. This one applies a presumption, allowing a bit of wiggle room for special circumstances (while exceeding either of the other two thresholds results in automatic rejection/termination). This presumption may be rebutted if the individual can demonstrate to SBA that their income for a specific period of time considered in the calculation was not typical or unusual–and that it is unlikely to occur again in the future. It can also be rebutted if the individual can show losses commensurate and directly related to the earnings were suffered and should be deducted from the calculation. And it can be rebutted if the individual has an S corporation, LLC, or partnership and can provide documentary evidence showing such income was either reinvested in the company or used to pay the company’s taxes.

Third, the fair market value of all assets held by the disadvantaged individual–this time, including their primary residence and equity in their company–must be at or below $6.5 million. Like the first threshold for adjusted net worth, however, this requirement still excludes investments in IRAs or other retirement accounts. But that is about it. As SBA’s rule regarding this threshold states, the “individual will generally not be considered economically disadvantaged if the fair market value of all his or her assets” exceeds this value.

What will SBA look at to determine whether an individual is economically disadvantaged under these thresholds?

SBA’s economic disadvantage rules require that “[e]ach individual claiming economic disadvantage must submit personal financial information.” This often includes the individual’s tax records, financial statements, and SBA’s own forms covering their finances and assets. The rules also note the following regarding the marital status of the individual being reviewed:

When married, an individual claiming economic disadvantage must submit separate financial information for his or her spouse, unless the individual and the spouse are legally separated. SBA will consider a spouse’s financial situation in determining an individual’s access to credit and capital where the spouse has a role in the business (e.g., an officer, employee or director) or has lent money to, provided credit support to, or guaranteed a loan of the business. SBA does not take into consideration community property laws when determining economic disadvantage.

Finally, if you are thinking, at this point, how easily one could simply “move money around” to meet these thresholds for economic disadvantage–SBA is one step ahead of you. The economic disadvantage rules also give SBA the authority to “look back” at any transfers within the last two years of the 8(a) application or reevaluation of the 8(a) participant, and with few exceptions, to include such in the calculations. SBA’s rules state:

SBA will attribute to an individual claiming disadvantaged status any assets which that individual has transferred to an immediate family member, or to a trust a beneficiary of which is an immediate family member, for less than fair market value, within two years prior to a concern’s application for participation in the 8(a) BD program or within two years of a Participant’s annual program review, unless the individual claiming disadvantaged status can demonstrate that the transfer is to or on behalf of an immediate family member for that individual’s education, medical expenses, or some other form of essential support.

The only other exception in the rules is for “any assets transferred by that individual to an immediate family member that are consistent with the customary recognition of special occasions, such as birthdays, graduations, anniversaries, and retirements.” But outside of these clearly stated exceptions, SBA tends to apply this rule quite strictly.

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So, that is 8(a) economic disadvantage in a nutshell. But again, before you get too excited about your personal financial compliance here, don’t forget about all the other 8(a) requirements, including those looking at the company’s finances. One such rule is the “Potential for Success” rule (covered in this prior blog and this blog), requiring 8(a) applicants/participants to demonstrate “reasonable prospects for success in competing in the private sector.” In other words, SBA wants to be confident your business will make it before they hand you up to nine years of grade-A federal contracting opportunities. And finally, like all of the SBA’s socioeconomic programs, there are still specific size requirements for any company applying to or participating in the 8(a) Program (which you can read about here). But as we have repeatedly assured you all, the 8(a) Program almost always seems to be worth it.

Questions about this post? Email us. Need legal assistance? Call us at 785-200-8919.

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