The 1994 850 had some issues with the knock sensors, and when the codes appear, there is an updated knock sensor wiring harness and knock sensors that needs to installed. The intake manifold needs to be removed to install this kit.
Here is the part: http://bit.ly/9XoTDO
I would find a good Volvo independent and have them perform this job, just make sure this goes to a good, qualified Volvo tech, or the fix will not last and the light will come back on. In fact, I'd be surprised if this kit wasn't already installed.
You can drive it like this and it won't hurt anything, however when you go for your smog inspection it will fail.
Here are some Volvo shops in your area: http://bit.ly/d5aU40