To amend the Internal Revenue Code of 1986 to clarify the proper treatment of differential wage payments made to employees called to active duty in the uniformed services, and for other purposes.

September 28, 2004

Mr. TURNER of Ohio (for himself and Mr. KLINE) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to clarify the proper treatment of differential wage payments made to employees called to active duty in the uniformed services, and for other purposes.

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 `Uniformed Services Differential Pay Protection Act'.

SEC. 2. 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. 3. 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

`(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.

END