[Congressional Record Volume 151, Number 72 (Thursday, May 26, 2005)]
[Senate]
[Pages S6034-S6037]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. LANDRIEU (for herself, Mr. Graham, Mr. Allen, Mr. Durbin, 
        and Mr. Lautenberg):
  S. 1142. A bill to provide pay protection for members of the Reserve 
and the National Guard, and for other purposes; to the Committee on 
Finance.
  Ms. LANDRIEU. Mr. President, over 50 years ago, Sir Winston Churchill 
uttered the immortal words, ``never in the field of human conflict has 
so much been owed by so many to so few.'' Although Prime Minister 
Churchill was referring to the selfless and courageous effort of the 
Royal Air Force in their defeat of the Germans in World War II, I would 
like to argue that these words apply equally to the men and women 
fighting to preserve democracy in Iraq and Afghanistan. These men and 
women are not only making it possible for each and every one of us to 
go about our daily lives under the blanket of safety and freedom to 
which Americans have become accustomed, but they are also striving to 
bring these benefits to people who have never had them before.
  If you have had the opportunity to spend time with these men and 
women, as I have, you quickly observe that they embody everything good 
about America. Their patriotism, their unyielding commitment to serve 
their country, their selflessness and their sacrifice should serve as 
examples to us all. Perhaps what amazes me most, is that although these 
men and women are prepared to make the ultimate sacrifice for their 
country, they ask for little in return from it. It is therefore 
incumbent on us to recognize the debt we owe to them, and honor it.
  Today there are 80,000 members of the National Guard and our Reserve 
armed forces serving bravely in the war on terror. In addition, close 
to 89,000 members of the Guard and Reserve have been activated in 
anticipation of being sent to Iraq, Afghanistan, or any other place 
their country calls on them to serve. While deployed, these citizen 
soldiers are asked, in a moment's notice, to leave their families, 
their jobs, and their communities behind, causing tremendous stress on 
the home front and in the workplace.
  While having a loved one in harm's way is reason for stress alone, 
many of the families of these men and women have the added stress of 
trying to fill the void left. Many families have lost the main bread 
winner when a Guardsmen or Reservist gets deployed. As a result, they 
have trouble paying bills, the rent, the mortgage, or medicine for 
their children.
  The primary reason these families cannot make ends meet is because 
for Guardsmen and Reservists military pay is often less than civilian 
pay. We call that the ``pay gap.'' According to the most recent Status 
of Forces Survey of Reserve Components, 51 percent of our citizen 
soldiers take a pay cut when they get deployed and 11 percent of them 
lose more than $2,500 per month.
  We ask these men and women to make so many sacrifices on our behalf. 
I think that it is time that we be willing to make one in return. The 
least we can do is to help these families find relief from the 
financial woes caused by this gap. To help do this, my colleagues 
Senator Graham, Senator Allen, Senator Durbin, and myself are pleased 
to introduce the Helping Our Patriotic Employers at Helping our 
Military Employees Act of 2005. We call the bill by its nickname: HOPE 
at HOME. Our guard and reserve families have enough to worry about when 
a loved one gets called away, the least we can do is relieve some of 
the financial worry by encouraging employers to make up the pay gap. 
Let me describe for my colleagues how this legislation works.

  HOPE at HOME will give a 50 percent tax credit to the thousands of 
employers around the country who have taken the patriotic step of 
continuing to pay the salary of their guard and reservists employees 
who have been called to active duty. There are literally thousands of 
employers out there who already take this noble step--they do it 
voluntarily, selflessly and at great sacrifice. The HOPE at HOME Act 
honors that sacrifice.
  HOPE at HOME will also encourage companies that cannot afford to make 
up the pay-gap an incentive to do it. One survey found that only 173 of 
the Fortune 500 companies make up the pay gap. If the wealthiest 
companies cannot afford to help their active duty employees, imagine 
how difficult this is for smaller companies. HOPE at HOME will allow 
companies large and small to do the patriotic thing and reward those 
employees who are serving to keep us all free.
  HOPE at HOME will also give small patriotic employers additional tax 
relief if they need to hire a worker to temporarily replace the active 
duty Guardsmen or Reservist. In addition, the bill clarifies the tax 
treatment of any pay-gap payments to make income tax filing easier for 
our Guard and Reservists.
  A moment ago, I mentioned that thousands of employers make up the 
pay-gap for their employees. There is one employer, however, and it 
happens to be the Nation's largest, that does not make up the pay gap: 
Uncle Sam. The Federal Government, which should set the bar for 
patriotism in our country, does not do its part to help citizen 
soldiers. Senator Durbin has been a leader in this area, so our bill 
includes language that he has been fighting to require the Federal 
Government to make up the pay gap. We cannot ask the private sector to 
do more than they are doing if the Federal Government is not willing to 
step up and do its part for our military men and women.
  This is not only the right thing to do, it is the smart thing to do. 
Today our Nation relies on the Guard and Reserve to meet our armed 
forces needs more than at any other time in our history. At times in 
the war on terror, forty-percent of our troops in Iraq and Afghanistan 
were citizen soldiers. Many of them performed multiple tours of duty or 
found their duties extended.
  All of the experts tell us that our need for our Guard and Reserve 
troops will only get greater. In the post-Cold War world, we have 
drastically reduced our standing Army from 800,000 in 1989 to 
approximately 482,000 today, a 40 percent decrease. The number of 
deployments has increased by over 300 percent. The Guard and Reserve 
have made it possible to meet these challenges. We still find ourselves 
stretched thin, but without the Guard and Reserve we would never be 
able to meet our obligation as guardians of freedom in the World.
  But this over-reliance on the Guard and Reserve is starting to have a 
toll on our ability to recruit and retain these men and women. The 
percentage of Army Reserve personnel who plan to remain in the military 
after their tour of duty ends fell from 73 percent to 66 percent over 
2004. The top reasons for leaving the Guard and Reserve, according to 
the Status of Forces Survey of Reserve Components, are family stress, 
the number and lengths of deployments, income loss, and conflict with 
civilian employment.
  We are beginning to have recruitment problems as well for our 
standing military. Back in February, the Army and the National Guard 
and Reserve recruited 3,824 soldiers, but this was only 69 percent of 
their monthly goal. The numbers went up in March, but still fell short 
by 12 percent of the goal.
  HOPE at HOME recognizes that a soldier who is worrying about how his 
or her family is paying the bills is not focusing on the mission at 
hand. A soldier who is worrying about whether the family is paying the 
rent, is not going

[[Page S6035]]

to reenlist. And every time one of our soldiers leaves, our Nation 
loses the experience and service of a highly trained, capable 
professional. We need to make every effort to keep our citizen soldiers 
in service to their country. HOPE at HOME is a first step to addressing 
our military's larger recruitment and retention issues.
  During the Cold War we built our strength on having the biggest, best 
equipped standing army in the World. Now our military gathers its 
strength from a large reserve of qualified men and women in the Guard 
and Reserve who are ready to fight at a moment's call. We will lose 
that strength if we do not give our Guardsmen and Reservists and their 
families HOPE at HOME.
  I hope my colleagues will join Senators Allen, Graham, Durbin and 
myself in supporting the HOPE at HOME Act.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1142

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Helping Our Patriotic 
     Employers at Helping Our Military Employees Act of 2005'' or 
     the ``HOPE at HOME Act of 2005''.

     SEC. 2. NONREDUCTION IN PAY WHILE FEDERAL EMPLOYEE IS 
                   PERFORMING ACTIVE SERVICE IN THE UNIFORMED 
                   SERVICES.

       (a) In General.--Subchapter IV of chapter 55 of title 5, 
     United States Code, is amended by adding at the end the 
     following:

     ``Sec. 5538. Nonreduction in pay while serving in the 
       uniformed services

       ``(a) An employee who is absent from a position of 
     employment with the Federal Government in order to perform 
     service in the uniformed services for a period of more than 
     90 days shall be entitled to receive, for each pay period 
     described in subsection (b), an amount equal to the amount by 
     which--
       ``(1) the amount of basic pay which would otherwise have 
     been payable to such employee for such pay period if such 
     employee's civilian employment with the Government had not 
     been interrupted by that service, exceeds (if at all)
       ``(2) the amount of pay and allowances which (as determined 
     under subsection (d))--
       ``(A) is payable to such employee for that service; and
       ``(B) is allocable to such pay period.
       ``(b)(1) Amounts under this section shall be payable with 
     respect to each pay period (which would otherwise apply if 
     the employee's civilian employment had not been 
     interrupted)--
       ``(A) during which such employee is entitled to 
     reemployment rights under chapter 43 of title 38 with respect 
     to the position from which such employee is absent (as 
     referred to in subsection (a)); and
       ``(B) for which such employee does not otherwise receive 
     basic pay (including by taking any annual, military, or other 
     paid leave) to which such employee is entitled by virtue of 
     such employee's civilian employment with the Government.
       ``(2) For purposes of this section, the period during which 
     an employee is entitled to reemployment rights under chapter 
     43 of title 38--
       ``(A) shall be determined disregarding the provisions of 
     section 4312(d) of title 38; and
       ``(B) shall include any period of time specified in section 
     4312(e) of title 38 within which an employee may report or 
     apply for employment or reemployment following completion of 
     service in the uniformed services.
       ``(c) Any amount payable under this section to an employee 
     shall be paid--
       ``(1) by such employee's employing agency;
       ``(2) from the appropriation or fund which would be used to 
     pay the employee if such employee were in a pay status; and
       ``(3) to the extent practicable, at the same time and in 
     the same manner as would basic pay if such employee's 
     civilian employment had not been interrupted.
       ``(d) The Office of Personnel Management shall, in 
     consultation with Secretary of Defense, prescribe any 
     regulations necessary to carry out the preceding provisions 
     of this section.
       ``(e)(1) The head of each agency referred to in section 
     2302(a)(2)(C)(ii) shall, in consultation with the Office, 
     prescribe procedures to ensure that the rights under this 
     section apply to the employees of such agency.
       ``(2) The Administrator of the Federal Aviation 
     Administration shall, in consultation with the Office, 
     prescribe procedures to ensure that the rights under this 
     section apply to the employees of that agency.
       ``(f) For purposes of this section--
       ``(1) the terms `employee', `Federal Government', and 
     `uniformed services' have the same respective meanings as 
     given in section 4303 of title 38;
       ``(2) the term `service in the uniformed services' has the 
     meaning given that term in section 4303 of title 38 and 
     includes duty performed by a member of the National Guard 
     under section 502(f) of title 32 at the direction of the 
     Secretary of the Army or Secretary of the Air Force;
       ``(3) the term `employing agency', as used with respect to 
     an employee entitled to any payments under this section, 
     means the agency or other entity of the Government (including 
     an agency referred to in section 2302(a)(2)(C)(ii)) with 
     respect to which such employee has reemployment rights under 
     chapter 43 of title 38; and
       ``(4) the term `basic pay' includes any amount payable 
     under section 5304.''.
       (b) Clerical Amendment.--The table of sections for chapter 
     55 of title 5, United States Code, is amended by inserting 
     after the item relating to section 5537 the following:

``5538. Nonreduction in pay while serving in the uniformed services or 
              National Guard''.


       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to pay periods (as described in 
     section 5538(b) of title 5, United States Code, as added by 
     this section) beginning on or after September 11, 2001.

     SEC. 3. READY RESERVE-NATIONAL GUARD EMPLOYEE CREDIT ADDED TO 
                   GENERAL BUSINESS CREDIT.

       (a) Ready Reserve-National Guard Credit.--Subpart D of part 
     IV of subchapter A of chapter 1 of the Internal Revenue Code 
     of 1986 (relating to business-related credits) is amended by 
     adding at the end the following:

     ``SEC. 45J. READY RESERVE-NATIONAL GUARD EMPLOYEE CREDIT.

       ``(a) General Rule.--For purposes of section 38, the Ready 
     Reserve-National Guard employee credit determined under this 
     section for any taxable year is an amount equal to 50 percent 
     of the actual compensation amount for such taxable year.
       ``(b) Definition of Actual Compensation Amount.--For 
     purposes of this section, the term `actual compensation 
     amount' means the amount of compensation paid or incurred by 
     an employer with respect to a Ready Reserve-National Guard 
     employee on any day during a taxable year when the employee 
     was absent from employment for the purpose of performing 
     qualified active duty.
       ``(c) Limitation.--No credit shall be allowed with respect 
     to a Ready Reserve-National Guard employee who performs 
     qualified active duty on any day on which the employee was 
     not scheduled to work (for reason other than to participate 
     in qualified active duty).
       ``(d) Definitions.--For purposes of this section--
       ``(1) Qualified active duty.--The term `qualified active 
     duty' means--
       ``(A) active duty, other than the training duty specified 
     in section 10147 of title 10, United States Code (relating to 
     training requirements for the Ready Reserve), or section 
     502(a) of title 32, United States Code (relating to required 
     drills and field exercises for the National Guard), in 
     connection with which an employee is entitled to reemployment 
     rights and other benefits or to a leave of absence from 
     employment under chapter 43 of title 38, United States Code, 
     and
       ``(B) hospitalization incident to such duty.
       ``(2) Compensation.--The term `compensation' means any 
     remuneration for employment, whether in cash or in kind, 
     which is paid or incurred by a taxpayer and which is 
     deductible from the taxpayer's gross income under section 
     162(a)(1).
       ``(3) Ready reserve-national guard employee.--The term 
     `Ready Reserve-National Guard employee' means an employee who 
     is a member of the Ready Reserve of a reserve component of an 
     Armed Force of the United States as described in sections 
     10142 and 10101 of title 10, United States Code.
       ``(4) Certain rules to apply.--Rules similar to the rules 
     of section 52 shall apply.
       ``(e) Portion of Credit Made Refundable.--
       ``(1) In general.--In the case of an eligible employer of a 
     Ready Reserve-National Guard employee, the aggregate credits 
     allowed to a taxpayer under subpart C shall be increased by 
     the lesser of--
       ``(A) the credit which would be allowed under this section 
     without regard to this subsection and the limitation under 
     section 38(c), or
       ``(B) the amount by which the aggregate amount of credits 
     allowed by this subpart (determined without regard to this 
     subsection) would increase if the limitation imposed by 
     section 38(c) for any taxable year were increased by the 
     amount of employer payroll taxes imposed on the taxpayer 
     during the calendar year in which the taxable year begins.

     The amount of the credit allowed under this subsection shall 
     not be treated as a credit allowed under this subpart and 
     shall reduce the amount of the credit otherwise allowable 
     under subsection (a) without regard to section 38(c).
       ``(2) Eligible employer.--For purposes of this subsection, 
     the term `eligible employer' means an employer which is a 
     State or local government or subdivision thereof.
       ``(3) Employer payroll taxes.--For purposes of this 
     subsection--
       ``(A) In general.--The term `employer payroll taxes' means 
     the taxes imposed by--
       ``(i) section 3111(b), and
       ``(ii) sections 3211(a) and 3221(a) (determined at a rate 
     equal to the rate under section 3111(b)).
       ``(B) Special rule.--A rule similar to the rule of section 
     24(d)(2)(C) shall apply for purposes of subparagraph (A).''.
       (b) Credit To Be Part of General Business Credit.--
     Subsection (b) of section 38 of

[[Page S6036]]

     such Code (relating to general business credit) is amended by 
     striking ``plus'' at the end of paragraph (18), by striking 
     the period at the end of paragraph (19) and inserting ``, 
     plus'', and by adding at the end the following:
       ``(20) the Ready Reserve-National Guard employee credit 
     determined under section 45J(a).''.
       (c) Denial of Double Benefit.--Section 280C(a) (relating to 
     rule for employment credits) is amended by inserting 
     ``45J(a),'' after ``45A(a),''.
       (d) Conforming Amendment.--The table of sections for 
     subpart D of part IV of subchapter A of chapter 1 of the 
     Internal Revenue Code of 1986 is amended by inserting after 
     the item relating to section 45I the following:

``Sec. 45J. Ready Reserve-National Guard employee credit.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 4. READY RESERVE-NATIONAL GUARD REPLACEMENT EMPLOYEE 
                   CREDIT.

       (a) In General.--Subpart B of part IV of subchapter A of 
     chapter 1 of the Internal Revenue Code of 1986 (relating to 
     foreign tax credit, etc.) is amended by adding after section 
     30A the following new section:

     ``SEC. 30B. READY RESERVE-NATIONAL GUARD REPLACEMENT EMPLOYEE 
                   CREDIT.

       ``(a) Allowance of Credit.--
       ``(1) In general.--In the case of an eligible taxpayer, 
     there shall be allowed as a credit against the tax imposed by 
     this chapter for the taxable year the sum of the employment 
     credits for each qualified replacement employee under this 
     section.
       ``(2) Employment credit.--The employment credit with 
     respect to a qualified replacement employee of the taxpayer 
     for any taxable year is equal to 50 percent of the lesser 
     of--
       ``(A) the individual's qualified compensation attributable 
     to service rendered as a qualified replacement employee, or
       ``(B) $12,000.
       ``(b) Qualified Compensation.--The term `qualified 
     compensation' means--
       ``(1) compensation which is normally contingent on the 
     qualified replacement employee's presence for work and which 
     is deductible from the taxpayer's gross income under section 
     162(a)(1),
       ``(2) compensation which is not characterized by the 
     taxpayer as vacation or holiday pay, or as sick leave or pay, 
     or as any other form of pay for a nonspecific leave of 
     absence, and
       ``(3) group health plan costs (if any) with respect to the 
     qualified replacement employee.
       ``(c) Qualified Replacement Employee.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified replacement 
     employee' means an individual who is hired to replace a Ready 
     Reserve-National Guard employee or a Ready Reserve-National 
     Guard self-employed taxpayer, but only with respect to the 
     period during which--
       ``(A) such Ready Reserve-National Guard employee is 
     receiving an actual compensation amount (as defined in 
     section 45J(b)) from the employee's employer and is 
     participating in qualified active duty, including time spent 
     in travel status, or
       ``(B) such Ready Reserve-National Guard self-employed 
     taxpayer is participating in such qualified active duty.
       ``(2) Ready reserve-national guard employee.--The term 
     `Ready Reserve-National Guard employee' has the meaning given 
     such term by section 45J(d)(3).
       ``(3) Ready reserve-national guard self-employed 
     taxpayer.--The term `Ready Reserve-National Guard self-
     employed taxpayer' means a taxpayer who--
       ``(A) has net earnings from self-employment (as defined in 
     section 1402(a)) for the taxable year, and
       ``(B) is a member of the Ready Reserve of a reserve 
     component of an Armed Force of the United States as described 
     in section 10142 and 10101 of title 10, United States Code.
       ``(d) Coordination With Other Credits.--The amount of 
     credit otherwise allowable under sections 51(a) and 1396(a) 
     with respect to any employee shall be reduced by the credit 
     allowed by this section with respect to such employee.
       ``(e) Limitations.--
       ``(1) Application with other credits.--The credit allowed 
     under subsection (a) for any taxable year shall not exceed 
     the excess (if any) of--
       ``(A) the regular tax for the taxable year reduced by the 
     sum of the credits allowable under subpart A and sections 27, 
     29, and 30, over
       ``(B) the tentative minimum tax for the taxable year.
       ``(2) Disallowance for failure to comply with employment or 
     reemployment rights of members of the reserve components of 
     the armed forces of the united states.--No credit shall be 
     allowed under subsection (a) to a taxpayer for--
       ``(A) any taxable year, beginning after the date of the 
     enactment of this section, in which the taxpayer is under a 
     final order, judgment, or other process issued or required by 
     a district court of the United States under section 4323 of 
     title 38 of the United States Code with respect to a 
     violation of chapter 43 of such title, and
       ``(B) the 2 succeeding taxable years.
       ``(f) General Definitions and Special Rules.--For purposes 
     of this section--
       ``(1) Eligible taxpayer.--The term `eligible taxpayer' 
     means a small business employer or a Ready Reserve-National 
     Guard self-employed taxpayer.
       ``(2) Small business employer.--
       ``(A) In general.--The term `small business employer' 
     means, with respect to any taxable year, any employer who 
     employed an average of 50 or fewer employees on business days 
     during such taxable year.
       ``(B) Controlled groups.--For purposes of subparagraph (A), 
     all persons treated as a single employer under subsection 
     (b), (c), (m), or (o) of section 414 shall be treated as a 
     single employer.
       ``(3) Qualified active duty.--The term `qualified active 
     duty' has the meaning given such term by section 45J(d)(1).
       ``(4) Special rules for certain manufacturers.--
       ``(A) In general.--In the case of any qualified 
     manufacturer--
       ``(i) subsection (a)(2)(B) shall be applied by substituting 
     `$20,000' for `$12,000', and
       ``(ii) paragraph (2)(A) of this subsection shall be applied 
     by substituting `100' for `50'.
       ``(B) Qualified manufacturer.--For purposes of this 
     paragraph, the term `qualified manufacturer' means any person 
     if--
       ``(i) the primary business of such person is classified in 
     sector 31, 32, or 33 of the North American Industrial 
     Classification System, and
       ``(ii) all of such person's facilities which are used for 
     production in such business are located in the United States.
       ``(5) Carryback and carryforward allowed.--
       ``(A) In general.--If the credit allowable under subsection 
     (a) for a taxable year exceeds the amount of the limitation 
     under subsection (e)(1) for such taxable year (in this 
     paragraph referred to as the `unused credit year'), such 
     excess shall be a credit carryback to each of the 3 taxable 
     years preceding the unused credit year and a credit 
     carryforward to each of the 20 taxable years following the 
     unused credit year.
       ``(B) Rules.--Rules similar to the rules of section 39 
     shall apply with respect to the credit carryback and credit 
     carryforward under subparagraph (A).
       ``(6) Certain rules to apply.--Rules similar to the rules 
     of subsections (c), (d), and (e) of section 52 shall 
     apply.''.
       (b) No Deduction for Compensation Taken Into Account for 
     Credit.--Section 280C(a) of the Internal Revenue Code of 1986 
     (relating to rule for employment credits), as amended by this 
     Act, is amended--
       (1) by inserting ``or compensation'' after ``salaries'', 
     and
       (2) by inserting ``30B,'' before ``45A(a),''.
       (c) Conforming Amendment.--Section 55(c)(2) of the Internal 
     Revenue Code of 1986 is amended by inserting ``30B(e)(1),'' 
     after ``30(b)(3),''.
       (d) Clerical Amendment.--The table of sections for subpart 
     B of part IV of subchapter A of chapter 1 of the Internal 
     Revenue Code of 1986 is amended by adding after the item 
     relating to section 30A the following new item:

``Sec. 30B. Credit for replacement of activated military reservists.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 5. INCOME TAX WITHHOLDING ON DIFFERENTIAL WAGE PAYMENTS.

       (a) In General.--Section 3401 of the Internal Revenue Code 
     of 1986 (relating to definitions) is amended by adding at the 
     end the following new subsection:
       ``(i) Differential Wage Payments to Active Duty Members of 
     the Uniformed Services.--
       ``(1) In general.--For purposes of subsection (a), any 
     differential wage payment shall be treated as a payment of 
     wages by the employer to the employee.
       ``(2) Differential wage payment.--For purposes of paragraph 
     (1), the term `differential wage payment' means any payment 
     which--
       ``(A) is made by an employer to an individual with respect 
     to any period during which the individual is performing 
     service in the uniformed services while on active duty for a 
     period of more than 30 days, and
       ``(B) represents all or a portion of the wages the 
     individual would have received from the employer if the 
     individual were performing service for the employer.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to remuneration paid after December 31, 2004.

     SEC. 6. TREATMENT OF DIFFERENTIAL WAGE PAYMENTS FOR 
                   RETIREMENT PLAN PURPOSES.

       (a) Pension Plans.--
       (1) In general.--Section 414(u) of the Internal Revenue 
     Code of 1986 (relating to special rules relating to veterans' 
     reemployment rights under USERRA) is amended by adding at the 
     end the following new paragraph:
       ``(11) Treatment of differential wage payments.--
       ``(A) In general.--Except as provided in this paragraph, 
     for purposes of applying this title to a retirement plan to 
     which this subsection applies--
       ``(i) an individual receiving a differential wage payment 
     shall be treated as an employee of the employer making the 
     payment,
       ``(ii) the differential wage payment shall be treated as 
     compensation, and

[[Page S6037]]

       ``(iii) the plan shall not be treated as failing to meet 
     the requirements of any provision described in paragraph 
     (1)(C) by reason of any contribution which is based on the 
     differential wage payment.
       ``(B) Special rule for distributions.--
       ``(i) In general.--Notwithstanding subparagraph (A)(i), for 
     purposes of section 401(k)(2)(B)(i)(I), 403(b)(7)(A)(ii), 
     403(b)(11)(A), or 457(d)(1)(A)(ii), an individual shall be 
     treated as having been severed from employment during any 
     period the individual is performing service in the uniformed 
     services described in section 3401(i)(2)(A).
       ``(ii) Limitation.--If an individual elects to receive a 
     distribution by reason of clause (i), the plan shall provide 
     that the individual may not make an elective deferral or 
     employee contribution during the 6-month period beginning on 
     the date of the distribution.
       ``(C) Nondiscrimination requirement.--Subparagraph (A)(iii) 
     shall apply only if all employees of an employer performing 
     service in the uniformed services described in section 
     3401(i)(2)(A) are entitled to receive differential wage 
     payments on reasonably equivalent terms and, if eligible to 
     participate in a retirement plan maintained by the employer, 
     to make contributions based on the payments. For purposes of 
     applying this subparagraph, the provisions of paragraphs (3), 
     (4), and (5), of section 410(b) shall apply.
       ``(D) Differential wage payment.--For purposes of this 
     paragraph, the term `differential wage payment' has the 
     meaning given such term by section 3401(i)(2).''.
       (2) Conforming amendment.--The heading for section 414(u) 
     of such Code is amended by inserting ``and to Differential 
     Wage Payments to Members on Active Duty'' after ``USERRA''.
       (b) Differential Wage Payments Treated as Compensation for 
     Individual Retirement Plans.--Section 219(f)(1) of the 
     Internal Revenue Code of 1986 (defining compensation) is 
     amended by adding at the end the following new sentence: 
     ``The term `compensation' includes any differential wage 
     payment (as defined in section 3401(i)(2)).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 2004.
       (d) Provisions Relating to Plan Amendments.--
       (1) In general.--If this subsection applies to any plan or 
     annuity contract amendment--
       (A) such plan or contract shall be treated as being 
     operated in accordance with the terms of the plan or contract 
     during the period described in paragraph (2)(B)(i), and
       (B) except as provided by the Secretary of the Treasury, 
     such plan shall not fail to meet the requirements of the 
     Internal Revenue Code of 1986 or the Employee Retirement 
     Income Security Act of 1974 by reason of such amendment.
       (2) Amendments to which section applies.--
       (A) In general.--This subsection shall apply to any 
     amendment to any plan or annuity contract which is made--
       (i) pursuant to any amendment made by this section, and
       (ii) on or before the last day of the first plan year 
     beginning on or after January 1, 2007.
       (B) Conditions.--This subsection shall not apply to any 
     plan or annuity contract amendment unless--
       (i) during the period beginning on the date the amendment 
     described in subparagraph (A)(i) takes effect and ending on 
     the date described in subparagraph (A)(ii) (or, if earlier, 
     the date the plan or contract amendment is adopted), the plan 
     or contract is operated as if such plan or contract amendment 
     were in effect, and
       (ii) such plan or contract amendment applies retroactively 
     for such period.
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