In the Senate of the United States,
October 11, 2004.
Resolved, That the bill from the House of Representa-
tives (H.R. 1779) entitled ‘‘An Act to amend the Internal
Revenue Code of 1986 to allow penalty-free withdrawals from
retirement plans during the period that a military reservist
or national guardsman is called to active duty for an ex-
tended period, and for other purposes.’’, do pass with the fol-
lowing
AMENDMENT:
Strike out all after the enacting clause and insert:
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Guardsmen and Reserv-
ists Financial Relief Act of 2004’’.
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HR 1779 EAS
SEC. 2. PENALTY-FREE WITHDRAWALS FROM RETIREMENT
PLANS FOR INDIVIDUALS CALLED TO ACTIVE
DUTY FOR AT LEAST 179 DAYS.
(a) IN GENERAL.—Paragraph (2) of section 72(t) of
the Internal Revenue Code of 1986 (relating to 10-percent
additional tax on early distributions from qualified retire-
ment plans) is amended by adding at the end the following
new subparagraph:
‘‘(G) DISTRIBUTIONS
FROM
RETIREMENT
PLANS
TO
INDIVIDUALS
CALLED
TO
ACTIVE
DUTY.—
‘‘(i) IN GENERAL.—Any qualified re-
servist distribution.
‘‘(ii) QUALIFIED RESERVIST DISTRIBU-
TION.—For purposes of this subparagraph,
the term ‘qualified reservist distribution’
means any distribution to an individual
if—
‘‘(I) such distribution is from any
qualified retirement plan (as defined
in section 4974(c)),
‘‘(II) such individual was (by rea-
son of being a member of a reserve
component (as defined in section 101
of title 37, United States Code)), or-
dered or called to active duty for a pe-
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HR 1779 EAS
riod in excess of 179 days or for an in-
definite period, and
‘‘(III) such distribution is made
during the period beginning on the
date of such order or call and ending
at the close of the active duty period.
‘‘(iii) 
APPLICATION
OF
SUBPARA-
GRAPH.—This subparagraph applies to in-
dividuals ordered or called to active duty
after September 11, 2001, and before Sep-
tember 12, 2005.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to distributions after September 11,
2001.
SEC. 3. INCOME TAX WITHHOLDING ON DIFFERENTIAL
WAGE PAYMENTS.
(a) IN GENERAL.—Section 3401 of the Internal Rev-
enue 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.
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‘‘(2) DIFFERENTIAL WAGE PAYMENT.—For pur-
poses 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 period
of more than 30 days, and
‘‘(B) represents all or a portion of the wages
the individual would have received from the em-
ployer 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. 4. 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 relat-
ing 
to 
veterans’ 
reemployment 
rights 
under
USERRA) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(11) TREATMENT OF DIFFERENTIAL WAGE PAY-
MENTS.—
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HR 1779 EAS
‘‘(A) IN GENERAL.—Except as provided in
this paragraph, for purposes of applying this
title to a retirement plan to which this sub-
section applies—
‘‘(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 pro-
vision 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 indi-
vidual shall be treated as having been sev-
ered from employment during any period
the individual is performing service in the
uniformed services described in section
3401(i)(2)(A).
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‘‘(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 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 con-
tributions 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
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HR 1779 EAS
‘‘AND TO DIFFERENTIAL WAGE PAYMENTS TO MEM-
BERS 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 (de-
fining 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 Secu-
rity Act of 1974 by reason of such amendment.
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(2) AMENDMENTS
TO
WHICH
SECTION
AP-
PLIES.—
(A) IN
GENERAL.—This subsection shall
apply to any amendment to any plan or annu-
ity 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 amend-
ment unless—
(i) during the period beginning on the
date the amendment described in subpara-
graph (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 con-
tract is operated as if such plan or contract
amendment were in effect; and
(ii) such plan or contract amendment
applies retroactively for such period.
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HR 1779 EAS
SEC. 5. READY RESERVE-NATIONAL GUARD EMPLOYEE
CREDIT 
AND 
READY 
RESERVE-NATIONAL
GUARD REPLACEMENT EMPLOYEE CREDIT.
(a) READY RESERVE-NATIONAL GUARD CREDIT.—
(1) IN GENERAL.—Subpart D of part IV of sub-
chapter A of chapter 1 of the Internal Revenue Code
of 1986 (relating to business-related credits) is
amended by inserting after section 45I the following
new section:
‘‘SEC. 45J. READY RESERVE-NATIONAL GUARD EMPLOYEE
CREDIT.
‘‘(a) GENERAL RULE.—For purposes of section 38, in
the case of an eligible taxpayer, the Ready Reserve-National
Guard employee credit determined under this section for
any taxable year with respect to each Ready Reserve-Na-
tional Guard employee of such taxpayer is an amount equal
to 50 percent of the lesser of—
‘‘(1) the actual compensation amount with re-
spect to such employee for such taxable year, or
‘‘(2) $30,000.
‘‘(b) 
DEFINITION
OF
ACTUAL
COMPENSATION
AMOUNT.—For purposes of this section, the term ‘actual
compensation amount’ means the amount of compensation
paid or incurred by an eligible taxpayer with respect to
a Ready Reserve-National Guard employee on any day
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HR 1779 EAS
when the employee was absent from employment for the
purpose of performing qualified active duty.
‘‘(c) LIMITATIONS.—No credit shall be allowed with re-
spect to any day that a Ready Reserve-National Guard em-
ployee who performs qualified active duty was not scheduled
to work (for reason other than to participate in qualified
active duty).
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) ELIGIBLE TAXPAYER.—
‘‘(A) IN GENERAL.—The term ‘eligible tax-
payer’ means a small business employer.
‘‘(B) SMALL BUSINESS EMPLOYER.—
‘‘(i) IN
GENERAL.—The term ‘small
business employer’ means, with respect to
any taxable year, any employer who em-
ployed an average of 50 or fewer employees
on business days during such taxable year.
‘‘(ii) CONTROLLED GROUPS.—For pur-
poses of clause (i), all persons treated as a
single employer under subsection (b), (c),
(m), or (o) of section 414 shall be treated as
a single employer.
‘‘(2) QUALIFIED ACTIVE DUTY.—The term ‘quali-
fied active duty’ means—
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‘‘(A) active duty under an order or call for
a period in excess of 179 days or for an indefi-
nite period, other than the training duty speci-
fied in section 10147 of title 10, United States
Code (relating to training requirements for the
Ready Reserve), or section 502(a) of title 32,
United States Code (relating to required drills
and field exercises for the National Guard), in
connection with which an employee is entitled to
reemployment rights and other benefits or to a
leave of absence from employment under chapter
43 of title 38, United States Code, and
‘‘(B) hospitalization incident to such duty.
‘‘(3) COMPENSATION.—The term ‘compensation’
means any remuneration for employment, whether in
cash or in kind, which is paid or incurred by a tax-
payer and which is deductible from the taxpayer’s
gross income under section 162(a)(1).
‘‘(4) READY
RESERVE-NATIONAL
GUARD
EM-
PLOYEE.—The term ‘Ready Reserve-National Guard
employee’ means an employee who is a member of the
Ready Reserve of a reserve component of an Armed
Force of the United States as described in sections
10142 and 10101 of title 10, United States Code.
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curred after September 30, 2004, in taxable years
ending after such date.
(b) READY RESERVE-NATIONAL GUARD REPLACEMENT
EMPLOYEE CREDIT.—
(1) IN
GENERAL.—Paragraph (1) of section
51(d) of the Internal Revenue Code of 1986 (relating
to members of targeted groups) is amended by strik-
ing ‘‘or’’ at the end of subparagraph (G), by striking
the period at the end of subparagraph (H) and insert-
ing ‘‘, or’’ and by adding at the end the following new
subparagraph:
‘‘(I) a qualified replacement employee.’’.
(2) QUALIFIED REPLACEMENT EMPLOYEE.—Sec-
tion 51(d) of the Internal Revenue Code of 1986 is
amended by redesignating paragraphs (10), (11), and
(12) as paragraphs (11), (12), and (13), respectively,
and by inserting after paragraph (9) the following
new paragraph:
‘‘(10) QUALIFIED REPLACEMENT EMPLOYEE.—
‘‘(A) IN GENERAL.—The term ‘qualified re-
placement employee’ means an individual who is
certified by the designated local agency as being
hired by an eligible taxpayer to replace a Ready
Reserve-National Guard employee of such tax-
payer, but only with respect to the period during
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which such Ready Reserve-National Guard em-
ployee participates in qualified active duty, in-
cluding time spent in travel status.
‘‘(B) GENERAL DEFINITIONS AND SPECIAL
RULES.—For purposes of this paragraph—
‘‘(i) ELIGIBLE
TAXPAYER.—The term
‘eligible taxpayer’ means a small business
employer.
‘‘(ii) SMALL BUSINESS EMPLOYER.—
‘‘(I) 
IN
GENERAL.—The 
term
‘small business employer’ means, with
respect to any taxable year, any em-
ployer who employed an average of 50
or fewer employees on business days
during such taxable year.
‘‘(II) CONTROLLED GROUPS.—For
purposes of subclause (I), all persons
treated as a single employer under sub-
section (b), (c), (m), or (o) of section
414 shall be treated as a single em-
ployer.
‘‘(iii) 
READY
RESERVE-NATIONAL
GUARD EMPLOYEE.—The term ‘Ready Re-
serve-National Guard employee’ has the
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meaning given such term by section
45J(d)(3).
‘‘(iv) QUALIFIED
ACTIVE
DUTY.—The
term ‘qualified active duty’ has the meaning
given such term by section 45J(d)(1).
‘‘(C) DISALLOWANCE FOR FAILURE TO COM-
PLY
WITH
EMPLOYMENT
OR
REEMPLOYMENT
RIGHTS OF MEMBERS OF THE RESERVE COMPO-
NENTS OF THE ARMED FORCES OF THE UNITED
STATES.—No credit shall be allowed under sub-
section (a) by reason of paragraph (1)(I) to a
taxpayer for—
‘‘(i) any taxable year, beginning after
the date of the enactment of this section, in
which the taxpayer is under a final order,
judgment, or other process issued or re-
quired by a district court of the United
States under section 4323 of title 38 of the
United States Code with respect to a viola-
tion of chapter 43 of such title, and
‘‘(ii) the 2 succeeding taxable years.’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to amounts paid or in-
curred to an individual who begins work for the em-
ployer after September 30, 2004.
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(c) STUDY BY GAO.—
(1) IN GENERAL.—The Comptroller General of
the United States shall study the following:
(A) What, if any, problems exist in recruit-
ing individuals for a reserve component of an
Armed Force of the United States.
(B) What, if any, problems exist as the re-
sult of providing differential wage payments (as
defined in section 3401(i)(2) of the Internal Rev-
enue Code of 1986 (as added by this Act)) to in-
dividuals described in subparagraph (A) in the
recruitment and retention of individuals as reg-
ular members of the Armed Forces of the United
States.
(C) Whether the credit allowed under section
45J of the Internal Revenue Code of 1986 (as
added by this section) is an effective incentive for
the hiring and retention of employees who are
individuals described in subparagraph (A) and
whether there exists any compliance problems in
the administration of such credit.
(2) REPORT.—The Comptroller General of the
United States shall report on the results of the study
required under paragraph (1) to the Committee of Fi-
nance of the Senate and the Committee on Ways and
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HR 1779 EAS
Means of the House of Representatives before July 1,
2005.
SEC. 6. PENALTY FREE WITHDRAWALS FROM RETIREMENT
PLANS FOR VICTIMS OF FEDERALLY DE-
CLARED NATURAL DISASTERS.
(a) IN GENERAL.—Paragraph (2) of section 72(t) of
the Internal Revenue Code of 1986 (relating to 10-percent
additional tax on early distributions from qualified retire-
ment plans), as amended by this Act, is amended by adding
at the end the following new subparagraph:
‘‘(H) DISTRIBUTIONS
FROM
RETIREMENT
PLANS
TO
VICTIMS
OF
FEDERALLY
DECLARED
NATURAL DISASTERS.—
‘‘(i) IN GENERAL.—Any qualified dis-
aster-relief distribution.
‘‘(ii) 
QUALIFIED
DISASTER-RELIEF
DISTRIBUTION.—For purposes of this sub-
paragraph, the term ‘qualified disaster-re-
lief distribution’ means any distribution to
an individual who has sustained a loss in
excess of $100 as a result of a major dis-
aster declared under the Robert T. Stafford
Disaster Relief and Emergency Assistance
Act—
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‘‘(I) if such distribution is made
from any qualified retirement plan (as
defined in section 4974(c)) during the
1-year period beginning on the date
such declaration is made, and
‘‘(II) to the extent such distribu-
tion does not exceed the amount of such
loss and is not compensated for by in-
surance or otherwise.
For purposes of subclause (II), the amount
of any loss shall be determined using the
greater of the fair market value of the prop-
erty on the day before the date of such dis-
aster or the adjusted basis of the property as
provided in section 1011, less any com-
pensation for such loss that the individual
has received as of the date of such distribu-
tion and any compensation for such loss
that the individual expects to receive, based
on a reasonable estimate. Any difference be-
tween the amount of compensation that an
individual expects to receive on the basis of
such an estimate and actually receives shall
not be included in the individual’s gross in-
come.’’.
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(b) EXEMPTION
OF DISTRIBUTIONS
FROM WITH-
HOLDING.—Paragraph (4) of section 402(c) of the Internal
Revenue Code of 1986 (relating to eligible rollover distribu-
tion) is amended by striking ‘‘and’’ at the end of subpara-
graph (B), by striking the period at the end of subpara-
graph (C) and inserting ‘‘, and’’, and by inserting at the
end the following new subparagraph:
‘‘(D) any qualified disaster-relief distribu-
tion 
(within 
the 
meaning 
of 
section
72(t)(2)(H).’’.
(c) CONFORMING AMENDMENTS.—
(1) Section 401(k)(2)(B)(i) of the Internal Rev-
enue Code of 1986 is amended by striking ‘‘or’’ at the
end of subclause (III), by striking ‘‘and’’ at the end
of subclause (IV) and inserting ‘‘or’’, and by inserting
after subclause (IV) the following new subclause:
‘‘(V) the date on which a period
referred to in section 72(t)(2)(H)(ii)(I)
begins (but only to the extent provided
in section 72(t)(2)(H)), and’’.
(2) Section 403(b)(7)(A)(ii) of such Code is
amended by inserting ‘‘sustains a loss as a result of
a major disaster declared under the Robert T. Staf-
ford Disaster Relief and Emergency Assistance Act
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(but 
only 
to 
the 
extent 
provided 
in 
section
72(t)(2)(H)),’’ before ‘‘or’’.
(3) Section 403(b)(11) of such Code is amended
by striking ‘‘or’’ at the end of subparagraph (A), by
striking the period at the end of subparagraph (B)
and inserting ‘‘, or’’, and by inserting after subpara-
graph (B) the following new subparagraph:
‘‘(C) for distributions to which section
72(t)(2)(H) applies.’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to distributions received in taxable years
beginning after December 31, 2003.
Attest:
Secretary.