II 

109TH CONGRESS 

1ST SESSION S. 1401 

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. 

IN THE SENATE OF THE UNITED STATES 

JULY 14, 2005 

Mr. GREGG (for himself, Mr. ROBERTS, and Mr. ALEXANDER) introduced the 

following bill; which was read twice and referred to the Committee on Finance 

A BILL 

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. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Uniformed Services 

5 Differential Pay Protection Act’’. 
2 

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1 SEC. 2. INCOME TAX WITHHOLDING ON DIFFERENTIAL 

2 WAGE PAYMENTS. 

3 (a) IN GENERAL.—Section 3401 of the Internal Rev4 enue Code of 1986 (relating to definitions) is amended by 

5 adding at the end the following new subsection: 

6 ‘‘(i) DIFFERENTIAL WAGE PAYMENTS TO ACTIVE

7 DUTY MEMBERS OF THE UNIFORMED SERVICES.— 

8 ‘‘(1) IN GENERAL.—For purposes of subsection 

9 (a), any differential wage payment shall be treated 

10 as a payment of wages by the employer to the em11 ployee. 

12 ‘‘(2) DIFFERENTIAL WAGE PAYMENT.—For 

13 purposes of paragraph (1), the term ‘differential 

14 wage payment’ means any payment which— 

15 ‘‘(A) is made by an employer to an indi16 vidual with respect to any period during which 

17 the individual is performing service in the uni18 formed services while on active duty for a pe19 riod of more than 30 days, and 

20 ‘‘(B) represents all or a portion of the 

21 wages the individual would have received from 

22 the employer if the individual were performing 

23 service for the employer.’’ 

24 (b) EFFECTIVE DATE.—The amendment made by 

25 this section shall apply to remuneration paid after Decem26 ber 31, 2005. 
3 

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1 SEC. 3. TREATMENT OF DIFFERENTIAL WAGE PAYMENTS 

2 FOR RETIREMENT PLAN PURPOSES. 

3 (a) PENSION PLANS.— 

4 (1) IN GENERAL.—Section 414(u) of the Inter5 nal Revenue Code of 1986 (relating to special rules 

6 relating to veterans’ reemployment rights under 

7 USERRA) is amended by adding at the end the fol8 lowing new paragraph: 

9 ‘‘(11) TREATMENT OF DIFFERENTIAL WAGE

10 PAYMENTS.— 

11 ‘‘(A) IN GENERAL.—Except as provided in 

12 this paragraph, for purposes of applying this 

13 title to a retirement plan to which this sub14 section applies— 

15 ‘‘(i) an individual receiving a differen16 tial wage payment shall be treated as an 

17 employee of the employer making the pay18 ment, 

19 ‘‘(ii) the differential wage payment 

20 shall be treated as compensation, and 

21 ‘‘(iii) the plan shall not be treated as 

22 failing to meet the requirements of any 

23 provision described in paragraph (1)(C) by 

24 reason of any contribution which is based 

25 on the differential wage payment. 
4 

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1 ‘‘(B) SPECIAL RULE FOR DISTRIBU2 TIONS.— 

3 ‘‘(i) IN GENERAL.—Notwithstanding 

4 subparagraph (A)(i), for purposes of sec5 tion 401(k)(2)(B)(i)(I), 403(b)(7)(A)(ii), 

6 403(b)(11)(A), or 457(d)(1)(A)(ii), an in7 dividual shall be treated as having been 

8 severed from employment during any pe9 riod the individual is performing service in 

10 the uniformed services described in section 

11 3401(i)(2)(A). 

12 ‘‘(ii) LIMITATION.—If an individual 

13 elects to receive a distribution by reason of 

14 clause (i), the plan shall provide that the 

15 individual may not make an elective defer16 ral or employee contribution during the 6- 

17 month period beginning on the date of the 

18 distribution. 

19 ‘‘(C) NONDISCRIMINATION REQUIRE20 MENT.—Subparagraph (A)(iii) shall apply only 

21 if all employees of an employer performing serv22 ice in the uniformed services described in sec23 tion 3401(i)(2)(A) are entitled to receive dif24 ferential wage payments on reasonably equiva25 lent terms and, if eligible to participate in a re-
5 

•S 1401 IS

1 tirement plan maintained by the employer, to 

2 make contributions based on the payments. For 

3 purposes of applying this subparagraph, the 

4 provisions of paragraphs (3), (4), and (5), of 

5 section 410(b) shall apply. 

6 ‘‘(D) DIFFERENTIAL WAGE PAYMENT.— 

7 For purposes of this paragraph, the term ‘dif8 ferential wage payment’ has the meaning given 

9 such term by section 3401(i)(2).’’ 

10 (2) CONFORMING AMENDMENT.—The heading 

11 for section 414(u) of such Code is amended by in12 serting ‘‘AND TO DIFFERENTIAL WAGE PAYMENTS

13 TO MEMBERS ON ACTIVE DUTY’’ after ‘‘USERRA’’. 

14 (b) DIFFERENTIAL WAGE PAYMENTS TREATED AS

15 COMPENSATION FOR INDIVIDUAL RETIREMENT PLANS.— 

16 Section 219(f)(1) of the Internal Revenue Code of 1986 

17 (defining compensation) is amended by adding at the end 

18 the following new sentence: ‘‘The term ‘compensation’ in19 cludes any differential wage payment (as defined in sec20 tion 3401(i)(2)).’’ 

21 (c) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply to plan years beginning after De23 cember 31, 2005. 

24 (d) PROVISIONS RELATING TO PLAN AMEND25 MENTS.— 
6 

•S 1401 IS

1 (1) IN GENERAL.—If this subsection applies to 

2 any plan or annuity contract amendment— 

3 (A) such plan or contract shall be treated 

4 as being operated in accordance with the terms 

5 of the plan or contract during the period de6 scribed in paragraph (2)(B)(i), and 

7 (B) except as provided by the Secretary of 

8 the Treasury, such plan shall not fail to meet 

9 the requirements of the Internal Revenue Code 

10 of 1986 or the Employee Retirement Income 

11 Security Act of 1974 by reason of such amend12 ment. 

13 (2) AMENDMENTS TO WHICH SECTION AP14 PLIES.— 

15 (A) IN GENERAL.—This subsection shall 

16 apply to any amendment to any plan or annuity 

17 contract which is made— 

18 (i) pursuant to any amendment made 

19 by this section, and 

20 (ii) on or before the last day of the 

21 first plan year beginning on or after Janu22 ary 1, 2008. 

23 (B) CONDITIONS.—This subsection shall 

24 not apply to any plan or annuity contract 

25 amendment unless— 
7 

•S 1401 IS

1 (i) during the period beginning on the 

2 date the amendment described in subpara3 graph (A)(i) takes effect and ending on the 

4 date described in subparagraph (A)(ii) (or, 

5 if earlier, the date the plan or contract 

6 amendment is adopted), the plan or con7 tract is operated as if such plan or con8 tract amendment were in effect; and 

9 (ii) such plan or contract amendment 

10 applies retroactively for such period. 

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