135
section (d) and by inserting after subsection (b) the fol-
lowing new subsection: 
‘‘(c) TAX ON EXCESSIVE EMPLOYEE REMUNERATION 
IN THE CASE OF BANKRUPTCY.—
‘‘(1) IN GENERAL.—There is hereby imposed a 
tax on any person who is a covered employee equal 
to 50 percent of any payment of excessive employee 
remuneration from a corporation which becomes a 
debtor in a title 11 or similar case (as defined in 
section 368(a)(3)(A) of this title, but not including 
a case under chapter 12 of title 11, United States 
Code). The tax imposed under subsection (a) shall 
not apply to the extent that a tax is imposed under 
this subsection. 
‘‘(2) SPECIAL RULES RELATING TO EXCESSIVE 
EMPLOYEE REMUNERATION.—For purposes of this 
subsection—
‘‘(A) EXCESS EMPLOYEE REMUNERATION 
DEFINED.—The term ‘excess employee remu-
neration’ means remuneration paid directly or 
indirectly to a covered employee during the 
bankruptcy period—
‘‘(i) for which a deduction is not al-
lowed under chapter 1 by reason of the ap-
plication of section 162(m) or would not be
136
allowed if section 162(m) applied to the 
covered employee at the time of payment, 
or 
‘‘(ii) in the case of remuneration to a 
covered employee of a corporation that is 
not a publicly held corporation described in 
section 
162(m)(2), 
that 
exceeds 
$1,000,000, other than remuneration that 
meets requirements similar to the stand-
ards for performance-based compensation 
under section 162(m)(4)(C). 
‘‘(B) Such term shall not include—
‘‘(i) remuneration that, on the date 
immediately prior to the beginning of the 
bankruptcy period, was payable to the cov-
ered employee under a binding obligation 
and not subject to a substantial risk of for-
feiture, 
‘‘(ii) remuneration attributable to con-
tributions to or benefits from an excess re-
tirement plan to the extent that such plan 
is maintained solely for the purpose of pro-
viding benefits to employees in excess of 
the limitations imposed by 1 or more of
137
sections 401(a)(17), 401(k), 401(m), and 
415, 
‘‘(iii) contributions to or benefits from 
a qualified employer plan (as defined in 
section 132(m)), or 
‘‘(iv) any payment that is avoided or 
approved by a bankruptcy trustee. 
‘‘(C) BANKRUPTCY
PERIOD.—The term 
‘bankruptcy period’ means any time during the 
period beginning 2 years before the date on 
which the corporation becomes a debtor de-
scribed in paragraph (1) and ending on the 
date such corporation ceases to be such a debt-
or. 
‘‘(D) COVERED
EMPLOYEE.—The term 
‘covered employee’—
‘‘(i) has the meaning given such term 
by section 162(m)(3), except that such 
term shall include an individual who is not 
a 
covered 
employee 
under 
section 
162(m)(3) for the taxable year in which 
such remuneration is paid but who pre-
viously was a covered employee within the 
meaning of section 162(m)(3) during the 
bankruptcy period, and
138
‘‘(ii) with respect to an employee of a 
corporation that is not subject to section 
162(m), includes any employee of such cor-
poration who would be subject to the re-
quirement 
described 
in 
section 
162(m)(3)(B) (as modified by this para-
graph) if such corporation were a publicly 
held corporation (as defined in section 
162(m)(2)). 
‘‘(E) 100 PERCENT TAX FOR GROSS UP 
PAYMENTS.—Subsection (b) shall be applied by 
substituting ‘100 percent’ for ‘50 percent’ to 
the extent that any payment is made during the 
bankruptcy period that is contingent upon a tax 
being imposed under this section. 
‘‘(F) CHANGE
IN
OWNERSHIP
CONTIN-
GENCY NOT TO APPLY.—Subsection (b) shall be 
applied without regard to clause (i) of section 
280G(b)(2)(A).’’. 
(b) EFFECTIVE DATE.—The amendment made this 
section shall apply to payments received after the date of 
the enactment of this Act with respect to any title 11 or 
similar case (as defined in section 4999(c) of the Internal 
Revenue Code of 1986) commenced after such date.
139
SEC. 510. DIFFERENTIAL PAY. 
(a) INCOME TAX WITHHOLDING.—Section 3401 of 
the Internal Revenue Code of 1986 (relating to defini-
tions) 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 an employer to an em-
ployee. 
‘‘(2) DIFFERENTIAL
WAGE
PAYMENTS.—For 
purposes of paragraph (1), the term ‘differential 
wage payment’ means any payment which—
‘‘(A) is made by an employer to an indi-
vidual with respect to any period during which 
the individual is performing service in the uni-
formed services while on active duty for a pe-
riod 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) RETIREMENT PLANS.—
(1) IN GENERAL.—Section 414(u) of the Inter-
nal Revenue Code of 1986 (relating to special rules
140
relating to veterans’ reemployment rights under 
USERRA) is amended by adding at the end the fol-
lowing 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 plan to which this subsection ap-
plies—
‘‘(i) an individual receiving a differen-
tial wage payment shall be treated as an 
employee of the employer making the pay-
ment, 
‘‘(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 the treatment described in 
clauses (i) and (ii). 
‘‘(B) 
SPECIAL
RULE
FOR
DISTRIBU-
TIONS.—
‘‘(i) IN
GENERAL.—Notwithstanding 
subparagraph (A)(i), for purposes of sub-
section (w)(1)(D), an individual shall be
141
treated as having been severed from em-
ployment 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 defer-
ral or employee contribution during the 6-
month period beginning on the date of the 
distribution. 
‘‘(C) 
NONDISCRIMINATION
REQUIRE-
MENT.—Subparagraph (A)(iii) shall apply only 
if all employees of an employer (as determined 
under subsections (b), (c), (m), and (o)) per-
forming service in the uniformed services de-
scribed in section 3401(i)(2)(A) are entitled to 
receive differential wage payments on reason-
ably equivalent terms and, if eligible to partici-
pate in a plan maintained by the employer, to 
have contributions made to such plan based on 
the payments on reasonably equivalent terms. 
For purposes of applying this subparagraph, 
the provisions of paragraphs (3), (4), and (5) of 
section 410(b) shall apply.
142
‘‘(D) DIFFERENTIAL
WAGE
PAYMENT.—
For purposes of this paragraph, the term ‘dif-
ferential 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 in-
serting ‘‘and to Differential Wage Payments to 
Members on Active Duty’’ after ‘‘USERRA’’. 
(c) 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’ in-
cludes any differential wage payments (as defined in sec-
tion 3401(i)(2)).’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to years beginning after December 
31, 2005. 
SEC. 511. EXCESS BENEFIT PLANS. 
(a) IN GENERAL.—Section 3(36) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 
1002(36)) is amended to read as follows: 
‘‘(36) The term ‘excess benefit plan’ means a 
plan, without regard to whether such plan is funded, 
maintained by an employer solely for the purpose of
143
providing benefits to employees in excess of any limi-
tation 
imposed 
by 
section 
401(a)(17), 
401(k)(3)(A)(ii), 401(m)(2), or 415 of the Internal 
Revenue Code of 1986. To the extent that a sepa-
rable part of a plan (as determined by the Secretary 
of Labor) maintained by an employer is maintained 
for such purpose, that part shall be treated as a sep-
arate plan which is an excess benefit plan.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to plan years beginning after De-
cember 31, 2005. 
SEC. 512. TAX TREATMENT OF EMPLOYEE CONTRIBUTIONS 
TO 
CONTRIBUTORY 
DEFINED 
BENEFIT 
PLANS. 
(a) AMENDMENT TO THE INTERNAL REVENUE CODE 
OF 1986.—Subsection (e) of section 402 of the Internal 
Revenue Code of 1986 (relating to other rules applicable 
to exempt trusts) is amended by adding at the end the 
following new paragraph: 
‘‘(8) MANDATORY
EMPLOYEE
CONTRIBUTIONS 
TO DEFINED BENEFIT PLANS.—
‘‘(A) IN GENERAL.—Qualified mandatory 
employee contributions shall not be includible in 
gross income for the taxable year of such con-
tribution.
144
‘‘(B) QUALIFIED
MANDATORY
EMPLOYEE 
CONTRIBUTIONS.—For purposes of subpara-
graph (A), the term ‘qualified mandatory em-
ployee contributions’ means employee contribu-
tions made pursuant to the terms of a defined 
benefit plan described in subparagraph (C) in 
effect on January 1, 2003 (determined without 
regard to any plan amendment made after such 
date), which—
‘‘(i) are mandatory contributions (as 
defined in section 411(c)(2)(C)), and 
‘‘(ii) do not exceed 2 percent of com-
pensation (within the meaning of section 
415(c)(3)). 
‘‘(C) 
DEFINED
BENEFIT
PLAN
DE-
SCRIBED.—For purposes of subparagraph (B), 
a defined benefit plan is described in this sub-
paragraph if such plan—
‘‘(i) requires employee contributions 
as a condition of participation in such 
plan, 
‘‘(ii) allows an employee to make a 
one-time irrevocable election to participate 
in the plan,
145
‘‘(iii) does not provide for employee 
contributions with respect to which a sepa-
rate account is maintained and treated as 
a defined contribution plan under section 
414(k), and 
‘‘(iv) is not a governmental plan 
(within the meaning of section 414(d)).’’. 
(b) WITHHOLDING.—Subsection (a) of section 3401 
of such Code (defining wages) is amended by striking ‘‘or’’ 
at the end of paragraph (20), by striking the period at 
the end of paragraph (21) and inserting ‘‘; or’’, and by 
inserting after paragraph (21) the following new para-
graph: 
‘‘(22) for any payment made to or for the ben-
efit of an employee if at the time of such payment 
it is reasonable to believe that the employee will be 
able to exclude such payment from income as a 
qualified mandatory employee contribution under 
section 402(e)(8).’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to contributions made in years be-
ginning after December 31, 2005.
146
SEC. 513. PROTECTING OLDER, LONGER SERVICE PARTICI-
PANTS. 
(a) PROTECTION OF OLDER, LONGER SERVICE PAR-
TICIPANTS IN DEFINED BENEFIT PLANS.—
(1) Not later than one year after the date of 
the enactment of this Act, the Secretary of the 
Treasury shall amend section 1.401(a)(4)–4 of the 
Treasury Regulations (as in effect on the date of the 
enactment of this Act) to permit a plan to provide 
benefits, rights, and features to a closed class of 
grandfathered participants, provided that such class 
of participants satisfies the requirements of such 
section as of the date that the class of participants 
was closed. Such section as amended shall ensure 
that participants who have been grandfathered 
under a former defined benefit plan formula may 
continue to receive all benefits, rights, and features 
under that formula, including early retirement bene-
fits. 
(2) Not later than one year after the date of 
the enactment of this Act, the Secretary of the 
Treasury 
shall 
amend 
section 
1.401(a)(4)–
8(b)(1)(iii)(D) of the Treasury Regulations (as in ef-
fect on the date of the enactment of this Act) to per-
mit a defined contribution plan to provide make 
whole contributions to a closed class of participants
147
whose defined benefit plan accruals have been re-
duced or eliminated, provided that such class of par-
ticipants satisfies section 410(b)(2)(A)(i) of the In-
ternal Revenue Code of 1986 as of the date that the 
class of participants was closed. 
(b) EFFECTIVE DATE.—This provisions of this sec-
tion shall take effect on the date of the enactment of this 
Act. 
SEC. 514. CLARIFICATION REGARDING ELECTIVE DEFER-
RALS. 
(a) IN GENERAL.—Not later than 6 months after the 
date of enactment of this Act, the Secretary of the Treas-
ury shall issue rules clarifying that employees who have 
had a severance from employment may make—
(1) elective deferrals described in section 
402(g)(3)(A), (B), or (C) of the Internal Revenue 
Code of 1986 (other than elective deferrals under 
section 401(k)(11) of such Code), 
(2) elective contributions under an eligible de-
ferred compensation plan described in section 457(b) 
of such Code, and 
(3) to the extent provided by the Secretary, 
elective deferrals described in section 402(g)(3)(D) 
or 401(k)(11) of such Code.