IRS Provides Procedures For Some Health Organizations To Change Accounting Methods For Unearned Premiums.

Part III -- Administrative, Procedural, and Miscellaneous

SECTION 1. PURPOSE

This notice provides procedures for a taxpayer to obtain automatic consent to change its method of accounting for unearned premiums by reason of § 833(c)(5) of the Internal Revenue Code (Code). Rev. Proc. 2008-52, 2008-2 C.B. 587, as amplified, clarified, and modified by Rev. Proc. 2009-39, 2002-2 C.B. 371, is modified; Notice 2010-79, 2010-49 I.R.B. 809, is clarified and modified.

SECTION 2. BACKGROUND

Section 833 of the Code provides special rules for existing Blue Cross and Blue Shield organizations within the meaning of § 833(c)(2), and certain other organizations that are described in § 833(c)(3).

Section 9016 of the Patient Protection and Affordable Care Act (H.R. 3590, P.L. 111-148) (the "Affordable Care Act") added § 833(c)(5) to the Code, effective for taxable years beginning after December 31, 2009. Section 833(c)(5) provides that § 833 does not apply to an otherwise-eligible organization unless the organization's medical loss ratio (MLR) during the taxable year is not less than 85 percent.

The application of § 833 in a taxable year followed by nonapplication of that provision in the subsequent taxable year (or vice versa) may result in one or more changes in accounting method. For example, accounting for 100 percent of unearned premiums under § 833(a)(3) in one year, but only 80 percent of unearned premiums under § 832(b)(4) in the next year is a change in method of accounting. Likewise, the loss (or recovery) of insurance company status may implicate a number of changes in methods of accounting because some methods of accounting are available only to insurance companies under Subchapter L. The special deduction allowed under §§ 833(a)(2) and 833(b) is not, however, a method of accounting.

SECTION 3. SCOPE

This notice applies to an existing Blue Cross or Blue Shield organization within the meaning of § 833(c)(2), or an organization described in § 833(c)(3), that is required to change its method of accounting for unearned premiums by reason of failing to meet the MLR requirements of § 833(c)(5), or by reason of meeting the MLR requirements of § 833(c)(5) after failing to meet those requirements in a prior year.

SECTION 4. CHANGES IN METHOD OF ACCOUNTING

A taxpayer that is required to change methods of accounting for unearned premiums under a situation described in Section 3 of this notice, must use the automatic change in method procedures of Rev. Proc. 2008-52, or its successor, as modified by this notice.

SECTION 5. EFFECT ON OTHER DOCUMENTS

.01 Rev. Proc. 2008-52 is modified to add new section XX to the APPENDIX, to read as follows:

SECTION 6. EFFECTIVE DATE

This notice is effective December 27, 2010.

DRAFTING INFORMATION

The principal author of this notice is Rebecca L. Baxter of the Office of Associate Chief Counsel (Financial Institutions & Products (CC:FIP:B04)). For further information regarding this notice contact Ms. Baxter on (202) 622-7117 (not a toll-free call).