Best Practices: SOP 50 10 6 Clarifies Requirements for SBA Loans Involving 401(k) Plans

Prior to the release of SOP 50 10 6, there had been a lot of confusion surrounding the processing of Small Business Administration (“SBA”) loans in which the borrower is owned by a 401(k) plan.  SOP 50 10 6, which became effective October 1, 2020, clarifies some of the confusion.  SOP 50 10 6 contains a new chapter with guidance for special transaction structures such as Eligible Passive Company structures, Employee Stock Ownership Plans, cooperatives and 401(k) plans including Rollover as Business Start-ups (“ROBS”) Plans.  This article will focus on the last category: 401(k) plans and ROBS plans.  

In SOP 50 10 6, SBA has clarified that single employer plansmay be processed under delegated authority, but only if the only investment held by the 401(k) plan is the equity in the borrower’s business.  Multiple employer plans (i.e. plans that hold the assets of other businesses in trust and are maintained by two or more unrelated employers) are not eligible for delegated processing and must instead be submitted through non-delegated processing.  

SBA also added a new requirement that prior to the disbursement of loan proceeds, the borrower must provide a certification to the lender that the borrower and the 401(k) plan are in compliance with all applicable IRS, Treasury, and Department of Labor requirements and that it will comply with all relevant operating and reporting requirements.  SBA also states that SBA loan proceeds may not be used for any 401(k) plan formation costs.  Further, SBA reminds lenders that a borrower’s ability to repay its loan may be impacted by adverse tax consequences due to a 401(k) plan sponsor’s failure to administer the plan properly.  

Although many SBA lenders were already familiar with certain documentation requirements that had become standard in the industry when processing loans to a borrower owned by a 401(k) plan or ROBS plan, the requirements were not previously spelled out in the SOP.  Now, SOP 50 10 6 provides detailed guidance regarding documentation requirements, including the following:

• A favorable determination letter from the IRS providing advance assurance that the terms of the 401(k) plan satisfies qualification requirements;
• For an existing 401(k) plan: the Annual Return/Report of Employee Benefit Plan;
• For a ROBS plan: c-corporation formation documents, plan adoption documents, stock purchase documents and related corporate resolutions.

SBA also indicated that all sponsors of the 401(k) plan, regardless of their individual ownership in the borrower, must personally guarantee the loan.  Additionally, the loan cannot be structured with an EPC/OC structure.  Although the required 401(k) related documentation is not exhaustive, it will help lenders to structure these financings properly and will enable small business applicants to be successful in their new ventures.  

For a more comprehensive look at SBA’s requirements for loans involving 401(k) plans and ROBS plans, see SOP 50 10 6 at pages 139-140.  And stay tuned for additional updates and clarifications from SBA as this is an evolving topic. For questions regarding SBA documentation requirements, contact the attorneys at Starfield & Smith at 215-542-7070.