SBA has overhauled rules governing the 8(a) program, imposing new restrictions on joint ventures and raising limits on a business owner’s annual income and wealth. The final rule, published in the Feb. 11 Federal Register, is the first rewrite of 8(a) regulations in more than 10 years. It becomes effective March 14.
In a joint venture between an 8(a) firm and a non-8(a) partner, the 8(a) firm will be required to do at least 40% of the work done by the joint venture. Since the JV is required to perform at least 50% of the work on a contract, that means the 8(a) partner must perform at least 20% of the total contract. The current rule requires only that the 8(a) firm do a “significant portion” of the work. The non-8(a) partner may not take a second bite of the apple by serving as a subcontractor to the joint venture. The 8(a) partner in the JV must receive profits commensurate with the amount of work it performs.
SBA has indicated that the new JV rules were a response to suspicions that Alaska Native Corporations were passing through virtually all work to a large partner. Legislation is pending in Congress to restrict the size of sole source contracts awarded to Alaska Native and tribally owned 8(a) firms. Alaska Native Corporations and tribally owned companies will be required to report how their 8(a) contracts benefited their communities.
The Alaska firms have argued that their payments to impoverished Native people justify their special procurement preferences, but congressional investigators found that some Alaska companies paid only a few hundred dollars in dividends to Native shareholders. The owner of a company entering the 8(a) program will not be considered economically disadvantaged if his annual income exceeds $250,000, averaged over a three-year period. To remain eligible for the program, the owner’s annual income may not exceed $350,000. 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. Since the 8(a) owner usually must be the highest paid employee, SBA said the higher income limits will allow 8(a) firms to pay competitive salaries to other top-level executives. An owner will not be considered economically disadvantaged if his assets exceed $4 million at the time of application for the 8(a) program.
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