To amend title 10, United States Code, to ensure that commissioned officers who serve in a reserve component of the Armed Forces are able to retire in the highest grade in which they have successfully served.

SECTION 1. ELECTION TO RECEIVE RETIRED PAY FOR NON-REGULAR SERVICE UPON 
              RETIREMENT FOR SERVICE IN AN ACTIVE RESERVE STATUS 
              PERFORMED AFTER ATTAINING ELIGIBILITY FOR REGULAR 
              RETIREMENT.

    (a) Election Authority; Requirements.--Subsection (a) of section 
12741 of title 10, United States Code, is amended to read as follows:
    ``(a) Authority To Elect To Receive Reserve Retired Pay.--(1) 
Notwithstanding the requirement in paragraph (4) of section 12731(a) of 
this title that a person may not receive retired pay under this chapter 
when the person is entitled, under any other provision of law, to 
retired pay or retainer pay, a person may elect to receive retired pay 
under this chapter, instead of receiving retired or retainer pay under 
chapter 65, 367, 571, or 867 of this title, if the person--
            ``(A) satisfies the requirements specified in paragraphs 
        (1) and (2) of such section for entitlement to retired pay 
        under this chapter;
            ``(B) served in an active status in the Selected Reserve of 
        the Ready Reserve after becoming eligible for retirement under 
        chapter 65, 367, 571, or 867 of this title (without regard to 
        whether the person actually retired or received retired or 
        retainer pay under one of those chapters); and
            ``(C) completed not less than two years of satisfactory 
        service (as determined by the Secretary concerned) in such 
        active status (excluding any period of active service).
    ``(2) The Secretary concerned may reduce the minimum two-year 
service requirement specified in paragraph (1)(C) in the case of a 
person who--
            ``(A) completed at least six months of service in a 
        position of adjutant general required under section 314 of 
        title 32 or in a position of assistant adjutant general 
        subordinate to such a position of adjutant general; and
            ``(B) failed to complete the minimum years of service 
        solely because the appointment of the person to such position 
        was terminated or vacated as described in section 324(b) of 
        title 32.''.
    (b) Actions To Effectuate Election.--Subsection (b) of such section 
is amended by striking paragraph (1) and inserting the following new 
paragraph:
            ``(1) terminate the eligibility of the person to retire 
        under chapter 65, 367, 571, or 867 of this title, if the person 
        is not already retired under one of those chapters, and 
        terminate entitlement of the person to retired or retainer pay 
        under one of those chapters, if the person was already 
        receiving retired or retainer pay under one of those chapters; 
        and''.
    (c) Conforming Amendment To Reflect New Variable Age Requirement 
for Retirement.--Subsection (d) of such section is amended--
            (1) in paragraph (1), by striking ``attains 60 years of 
        age'' and inserting ``attains the eligibility age applicable to 
        the person under section 12731(f) of this title''; and
            (2) in paragraph (2)(A), by striking ``attains 60 years of 
        age'' and inserting ``attains the eligibility age applicable to 
        the person under such section''.
    (d) Clerical Amendments.--
            (1) Section heading.--The heading for section 12741 of such 
        title is amended to read as follows:
``Sec. 12741. Retirement for service in an active status performed in 
              the Selected Reserve of the Ready Reserve after 
              eligibility for regular retirement''.
            (2) Table of sections.--The table of sections at the 
        beginning of chapter 1223 of such title is amended by striking 
        the item relating to section 12741 and inserting the following 
        new item:

``12741. Retirement for service in an active status performed in the 
                            Selected Reserve of the Ready Reserve after 
                            eligibility for regular retirement.''.
    (e) Retroactive Applicability.--The amendments made by this section 
shall take effect as of January 1, 2008.

SEC. 2. RECOMPUTATION OF RETIRED PAY AND ADJUSTMENT OF RETIRED GRADE OF 
              RESERVE RETIREES TO REFLECT SERVICE AFTER RETIREMENT.

    (a) Recomputation of Retired Pay.--Section 12739 of title 10, 
United States Code, is amended by adding at the end the following new 
subsection:
    ``(e)(1) If a member of the Retired Reserve is recalled to an 
active status in the Selected Reserve of the Ready Reserve under 
section 10145(d) of this title and completes not less than two years of 
service in such active status, the member is entitled to the 
recomputation under this section of the retired pay of the member.
    ``(2) The Secretary concerned may reduce the two-year service 
requirement specified in paragraph (1) in the case of a member who--
            ``(A) is recalled to serve in a position of adjutant 
        general required under section 314 of title 32 or in a position 
        of assistant adjutant general subordinate to such a position of 
        adjutant general;
            ``(B) completes at least six months of service in such 
        position; and
            ``(C) fails to complete the minimum two years of service 
        solely because the appointment of the member to such position 
        is terminated or vacated as described in section 324(b) of 
        title 32.''.
    (b) Adjustment of Retired Grade.--Section 12771 of such title is 
amended--
            (1) by striking ``Unless'' and inserting ``(a) Grade on 
        Transfer.--Unless''; and
            (2) by adding at the end the following new subsection:
    ``(b) Effect of Subsequent Recall to Active Status.--(1) If a 
member of the Retired Reserve who is a commissioned officer is recalled 
to an active status in the Selected Reserve of the Ready Reserve under 
section 10145(d) of this title and completes not less than two years of 
service in such active status, the member is entitled to an adjustment 
in the retired grade of the member in the manner provided in section 
1370(d) of this title.
    ``(2) The Secretary concerned may reduce the two-year service 
requirement specified in paragraph (1) in the case of a member who--
            ``(A) is recalled to serve in a position of adjutant 
        general required under section 314 of title 32 or in a position 
        of assistant adjutant general subordinate to such a position of 
        adjutant general;
            ``(B) completes at least six months of service in such 
        position; and
            ``(C) fails to complete the minimum two years of service 
        solely because the appointment of the member to such position 
        is terminated or vacated as described in section 324(b) of 
        title 32.''.
    (c) Retroactive Applicability.--The amendments made by this section 

shall take effect as of January 1, 2008.

Summary: Allows an individual to elect to receive retired pay for non-regular (reserve) service upon retirement for service performed in an active reserve status after attaining eligibility for regular retirement, as long as the individual successfully completes at least two years of active reserve status service. Allows the Secretary of the military department concerned to reduce the two-year active reserve status requirement in certain cases. Requires the recomputation of reserve retired pay and, if appropriate, the adjustment of the retired grade of reserve retirees to reflect the successful completion of at least two years of post-retirement service in an active reserve status.