Best Practices: Recently Updated SBA Form 1919 Highlights Agency’s Continued Focus on 401(k) Plans

Effective November 3, 2020, the U.S. Small Business Administration (SBA) announced the update and release of SBA Form 1919, Borrower Information Form.  SBA Information Notice 5000-20059.  Among other things, the new Borrower Information Form highlights the SBA’s continued focus on businesses owned in whole or in part by a 401(k) plan (including Rollovers as Business Startups (ROBS)).  SBA Form 1919, Borrower Information Form, divided now in three sections, collects information about the small business applicant and its associates and must be completed by all small business applicants, associates, and key employees, in connection with all loans under the 7(a) Programs.  

Section I added selection boxes to clearly identify if the applicant is organized as a 401(k) Plan.   It also added a question to determine if the applicant’s source of equity is a 401(k) plan (including a ROBS).  Additionally, the revised form includes a brand new section (Section III) specifically designed to collect information on entity owners of the small business applicant, including checkboxes to clearly identify the type of entity owner and its legal structure.

In general, Section III requests information about each of the applicant’s owners – for each entity owning an equity interest in the applicant, identifying among them specifically a 401(k) plan.  Whenever an applicant is owned in part, or in whole, by a 401(k) plan, the applicant must also provide to the lender evidence that the applicant, or 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.  What the evidence is or how a lender monitors the borrower’s continued compliance post-closing is not yet clear.

What is clear is the SBA’s overall concern with businesses owned in whole or in part by a 401(k) plan: 

“When evaluating applications involving such businesses, SBA Lenders must consider that a 401(k) plan sponsor’s failure to administer the plan properly may result in plan disqualification and adverse tax consequences to the plan’s sponsor and its participants, which may impact the Borrower’s ability to repay the loan.”  SOP 50 10 6, page 139.

In addition to the information required in the SBA Form 1919, the SOP also now requires lenders to identify in E-Tran or SBA One and in the credit memorandum the following: (i) the specific type of 401(k) plan (Single Employer Plan, Multiple Employer Plan, etc.); and (ii) if applicable, that the applicant is using a ROBS plan for the equity contribution or other purpose (if the latter, to specify the purpose of the ROBS plan).

Lastly, prior to any disbursement of loan proceeds, lenders must obtain the borrower’s certification 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.  For questions regarding SBA loans involving 401(k) plans, please contact the attorneys at Starfield & Smith at 215-542-7070.