‘‘(1) IN GENERAL.—In the case of an employer 
described in paragraph (2), the aggregate credits al-
lowed to a taxpayer under subpart C shall be in-
creased by the lesser of— 
‘‘(A) the credit which would be allowed 
under this section without regard to this sub-
section and the limitation under section 38(c), 
or 
‘‘(B) the amount by which the aggregate 
amount of credits allowed by this subpart (de-
termined without regard to this subsection) 
would increase if the limitation imposed by sec-
tion 38(c) for any taxable year were increased 
by the amount of employer payroll taxes im-
posed on the taxpayer during the calendar year 
in which the taxable year begins. 
The amount of the credit allowed under this sub-
section shall not be treated as a credit allowed under 
this subpart and shall reduce the amount of the 
credit otherwise allowable under subsection (a) with-
out regard to section 38(c). 
‘‘(2) EMPLOYER DESCRIBED.—An employer is 
described in this paragraph if the employer is— 
‘‘(A) an organization exempt from tax 
under this chapter,
‘‘(B) any State or political subdivision 
thereof, the District of Columbia, any posses-
sion of the United States, or any agency or in-
strumentality of any of the foregoing, or 
‘‘(C) any Indian tribal government (within 
the meaning of section 7871) or any agency or 
instrumentality thereof. 
‘‘(3) EMPLOYER
PAYROLL
TAXES.—For pur-
poses of this subsection— 
‘‘(A) IN
GENERAL.—The term ‘employer 
payroll taxes’ means the taxes imposed by— 
‘‘(i) section 3111(b), and 
‘‘(ii) sections 3211(a) and 3221(a) 
(determined at a rate equal to the rate 
under section 3111(b)). 
‘‘(B) SPECIAL
RULE.—A rule similar to 
the rule of section 24(d)(2)(C) shall apply for 
purposes of subparagraph (A). 
‘‘(e) DEFINITIONS.—In this section— 
‘‘(1) The terms ‘active duty for a period of 
more than 30 days’, ‘member’, and ‘reserve compo-
nent’ have the meanings given such terms in section 
101 of title 37, United States Code. 
‘‘(2) The term ‘compensation’ means any remu-
neration for employment, whether in cash or in kind,
which is paid or incurred by a taxpayer and which 
is deductible from the taxpayer’s gross income under 
section 162(a)(1). 
‘‘(3) The term ‘Ready Reserve-National Guard 
employee’ with respect to an employer, means an 
employee of the employer who is also a member of 
a reserve component during a taxable year.’’. 
(b) CREDIT TO BE PART OF GENERAL BUSINESS 
CREDIT.—Subsection (b) of section 38 of such Code (re-
lating to general business credit) is amended by striking 
‘‘plus’’ at the end of paragraph (18), by striking the period 
at the end of paragraph (19) and inserting ‘‘, plus’’, and 
by adding at the end the following new paragraph: 
‘‘(20) the active-duty reserve component em-
ployee credit determined under section 45J(a).’’. 
(c) CONFORMING AMENDMENT.— 
(1) Paragraph (2) of section 1324(b) of title 
31, United States Code, is amended by inserting ‘‘or 
45J’’ after ‘‘section 35’’. 
(2) The table of sections for subpart D of part 
IV of subchapter A of chapter 1 of the Internal Rev-
enue Code of 1986 is amended by inserting after the 
item relating to section 45I the following new item: 
‘‘Sec. 45J. Active-duty reserve component employee credit.’’.
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 623. DIFFERENTIAL WAGE PAYMENTS. 
(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 the employer to the em-
ployee. 
‘‘(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 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) TREATMENT
OF DIFFERENTIAL WAGE PAY-
MENTS FOR RETIREMENT PLAN PURPOSES.— 
(1) PENSION PLANS.— 
(A) IN GENERAL.—Section 414(u) of such 
Code (relating to special rules relating to vet-
erans’ 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 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 
provision described in paragraph (1)(C) by
reason of any contribution which is based 
on the differential wage payment. 
‘‘(B) 
SPECIAL
RULE
FOR
DISTRIBU-
TIONS.— 
‘‘(i) IN
GENERAL.—Notwithstanding 
subparagraph (A)(i), for purposes of sec-
tion 401(k)(2)(B)(i)(I), 403(b)(7)(A)(ii), 
403(b)(11)(A), or 457(d)(1)(A)(ii), an in-
dividual shall be treated as having been 
severed from employment during any pe-
riod 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 performing serv-
ice in the uniformed services described in sec-
tion 3401(i)(2)(A) are entitled to receive dif-
ferential wage payments on reasonably equiva-
lent terms and, if eligible to participate in a re-
tirement 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 ‘dif-
ferential wage payment’ has the meaning given 
such term by section 3401(i)(2).’’. 
(B) 
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’’. 
(2) DIFFERENTIAL WAGE PAYMENTS TREATED 
AS
COMPENSATION
FOR
INDIVIDUAL
RETIREMENT 
PLANS.—Section 219(f)(1) of such Code (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 DATES.—
100 
(1) SUBSECTION (a).—The amendments made 
by subsection (a) shall apply to remuneration paid 
after December 31, 2004. 
(2) SUBSECTION (b).—The amendments made 
by subsection (b) shall apply to plan years beginning 
after December 31, 2004. 
(d) PROVISIONS
RELATING
TO
PLAN
AMEND-
MENTS.— 
(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 de-
scribed 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 amend-
ment. 
(2) AMENDMENTS
TO
WHICH
SECTION
AP-
PLIES.— 
(A) IN
GENERAL.—This subsection shall 
apply to any amendment to any plan or annuity 
contract which is made—
101 
(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 Janu-
ary 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 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 con-
tract amendment were in effect; and 
(ii) such plan or contract amendment 
applies retroactively for such period. 
SEC. 624. CREDIT FOR INCOME DIFFERENTIAL FOR EM-
PLOYMENT OF ACTIVATED MILITARY RE-
SERVIST AND REPLACEMENT PERSONNEL. 
(a) IN GENERAL.—Subpart B of part IV of sub-
chapter A of chapter 1 of the Internal Revenue Code of 
1986 (relating to other credits) is amended by adding at 
the end the following new section: