The Internal Revenue Service (IRS) has given nonprofit Blue Cross and Blue Shield plans that violate new medical loss ratio requirements a mechanism to stay in compliance with tax accounting rules.

The IRS describes the accounting flexibility mechanism in IRS Notice 2011-04.

Starting in 2011, the Affordable Care Act, the package that includes the Patient Protection and Affordable Care Act (PPACA), will require health carriers to spend at least 85% of large group premiums and 80% of individual and small group premiums on health care and quality improvement efforts.

Another section of PPACA, PPACA Section 9016, will take federal income tax benefits away from nonprofit health plans and nonprofit Blues plans if the plans fail to spend at least 85% of premium revenue on health care and quality improvement efforts.

The provision lets an eligible plan deduct 25% of claims and expenses and 100% of unearned premium reserves from taxable income.

If a plan violates Internal Revenue Code Section 833(c)(5), the new 85% medical loss ratio (MLR) rule, then it will have to change its method of accounting for unearned premiums.

The new notice will let plans that violate the 85% MLR requirement change accounting methods using an automatic method described in IRS Revenue Procedure 2008-52, or an update of that revenue procedure.

The notice took effect Dec. 27, 2010.