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.

Summary: Uniformed Services Differential Pay Protection Act - Amends the Internal Revenue Code to treat differential wage payments as a payment of wages by an employer to an employee for income tax purposes. Defines "differential wage payment" as any employer payment to an individual serving on active duty in the uniformed services for more than 30 days which represents wages such individual would have received if such individual were performing services for the employer.

Treats an individual receiving differential wage payments as an employee and treats differential wage payments as compensation for retirement plan purposes.

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.