Treatment of Blue Cross and Blue Shield organizations, etc.
General rule
In the case of any organization to which this section applies—
Treated as stock company
Special deduction allowed
Reductions in unearned premium reserves not to apply
Amount of deduction
In general
Except as provided in paragraph (2), the deduction determined under this subsection for any taxable year is the excess (if any) of—
25 percent of the sum of—
the claims incurred during the taxable year and liabilities incurred during the taxable year under cost-plus contracts, and
the expenses incurred during the taxable year in connection with the administration, adjustment, or settlement of claims or in connection with the administration of cost-plus contracts, over
the adjusted surplus as of the beginning of the taxable year.
Limitation
Adjusted surplus
For purposes of this subsection—
In general
The adjusted surplus as of the beginning of any taxable year is an amount equal to the adjusted surplus as of the beginning of the preceding taxable year—
increased by the amount of any adjusted taxable income for such preceding taxable year, or
decreased by the amount of any adjusted net operating loss for such preceding taxable year.
Special rule
Adjusted taxable income
The term “adjusted taxable income” means taxable income determined—
without regard to the deduction determined under this subsection,
without regard to any carryforward or carryback to such taxable year, and
by increasing gross income by an amount equal to the net exempt income for the taxable year.
Adjusted net operating loss
Net exempt income
The term “net exempt income” means—
any tax-exempt interest received or accrued during the taxable year, reduced by any amount (not otherwise deductible) which would have been allowable as a deduction for the taxable year if such interest were not tax-exempt, and
the aggregate amount allowed as a deduction for the taxable year under sections 243 and 245.
The amount determined under clause (ii) shall be reduced by the amount of any decrease in deductions allowable for the taxable year by reason of section 832(b)(5)(B) to the extent such decrease is attributable to deductions under sections 243 and 245.
Only health-related items taken into account
Organizations to which section applies
In general
This section shall apply to—
any existing Blue Cross or Blue Shield organization, and
any other organization meeting the requirements of paragraph (3).
Existing Blue Cross or Blue Shield organization
The term “existing Blue Cross or Blue Shield organization” means any Blue Cross or Blue Shield organization if—
such organization was in existence on
such organization is determined to be exempt from tax for its last taxable year beginning before
no material change has occurred in the operations of such organization or in its structure after
To the extent permitted by the Secretary, any successor to an organization meeting the requirements of the preceding sentence, and any organization resulting from the merger or consolidation of organizations each of which met such requirements, shall be treated as an existing Blue Cross or Blue Shield organization.
Other organizations
In general
An organization meets the requirements of this paragraph for any taxable year if—
substantially all the activities of such organization involve the providing of health insurance,
at least 10 percent of the health insurance provided by such organization is provided to individuals and small groups (not taking into account any medicare supplemental coverage),
such organization provides continuous full-year open enrollment (including conversions) for individuals and small groups,
such organization’s policies covering individuals provide full coverage of pre-existing conditions of high-risk individuals without a price differential (with a reasonable waiting period), and coverage is provided without regard to age, income, or employment status of individuals under age 65,
at least 35 percent of its premiums are determined on a community rated basis, and
no part of its net earnings inures to the benefit of any private shareholder or individual.
Small group defined
For purposes of subparagraph (A), the term “small group” means the lesser of—
15 individuals, or
the number of individuals required for a small group under applicable State law.
Special rule for determining adjusted surplus
Treatment as existing Blue Cross or Blue Shield organization
In general
Applicable organization
An organization is described in this subparagraph if it—
is organized under, and governed by, State laws which are specifically and exclusively applicable to not-for-profit health insurance or health service type organizations, and
is not a Blue Cross or Blue Shield organization or health maintenance organization.
Nonapplication of section in case of low medical loss ratio
Source
(Added Pub. L. 99–514, title X, § 1012(b)(1),Notes
References in Text
Amendments
Effective Date of 2014 Amendment
Effective Date of 2010 Amendment
Effective Date of 1997 Amendment
Effective Date of 1996 Amendment
Effective Date
In general.—
The amendments made by this section [enacting this section and amending section 501 of this title] shall apply to taxable years beginning after
Study of fraternal beneficiary associations.—
The Secretary of the Treasury or his delegate shall conduct a study of organizations described in section 501(c)(8) of the Internal Revenue Code of 1986 and which received gross annual insurance premiums in excess of $25,000,000 for the taxable years of such organizations which ended during 1984. Not later than
Special rules for existing blue cross or blue shield organizations.—
In general.—
In the case of any existing Blue Cross or Blue Shield organization (as defined in section 833(c)(2) of the Internal Revenue Code of 1986 as added by this section)—
no adjustment shall be made under section 481 (or any other provision) of such Code on account of a change in its method of accounting for its 1st taxable year beginning after
for purposes of determining gain or loss, the adjusted basis of any asset held on the 1st day of such taxable year shall be treated as equal to its fair market value as of such day.
Treatment of certain distributions.—
For purposes of section 833(b)(3)(B), the surplus of any organization as of the beginning of its 1st taxable year beginning after
Reserve weakening after august 16, 1986.—
Any reserve weakening after
Other special rules.—
The amendments made by this section shall not apply with respect to that portion of the business of Mutual of America which is attributable to pension business.
The amendments made by this section shall not apply to that portion of the business of the Teachers Insurance Annuity Association-College Retirement Equities Fund which is attributable to pension business.
The amendments made by this section shall not apply to—
the retirement fund of the YMCA,
the Missouri Hospital Plan,
administrative services performed by municipal leagues, and
dental benefit coverage provided by a Delta Dental Plans Association organization through contracts with independent professional service providers so long as the provision of such coverage is the principal activity of such organization.
For purposes of this paragraph, the term ‘pension business’ means the administration of any plan described in section 401(a) of the Internal Revenue Code of 1954 [now 1986] which includes a trust exempt from tax under section 501(a), any plan under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b) of such Code, any individual retirement plan described in section 408 of such Code, and any eligible deferred compensation plan to which section 457(a) of such Code applies.”
Termination of Certain Exceptions From Rules Relating to Exempt Organizations Which Provide Commercial-Type Insurance
In General.—
Subparagraphs (A) and (B) of section 1012(c)(4) of the Tax Reform Act of 1986 [Pub. L. 99–514, set out as an Effective Date note above] shall not apply to any taxable year beginning after
Special Rules.—
In the case of an organization to which section 501(m) of the Internal Revenue Code of 1986 applies solely by reason of the amendment made by subsection (a)—
no adjustment shall be made under section 481 (or any other provision) of such Code on account of a change in its method of accounting for its first taxable year beginning after
for purposes of determining gain or loss, the adjusted basis of any asset held on the 1st day of such taxable year shall be treated as equal to its fair market value as of such day.
Reserve Weakening After June 8, 1997.—
Any reserve weakening after
Regulations.—
The Secretary of the Treasury or his delegate may prescribe rules for providing proper adjustments for organizations described in subsection (b) with respect to short taxable years which begin during 1998 by reason of section 843 of the Internal Revenue Code of 1986.”