422
year period referred to in clause (ii) end 
before the date which is 2-years after the 
date of the enactment of this subpara-
graph.’’. 
(b) CONFORMING AMENDMENTS.—
(1) Section 401(k)(2)(B)(i) of such Code 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) in the case of a qualified re-
servist distribution (as defined in sec-
tion 72(t)(2)(G)(iii)), the date on 
which a period referred to in sub-
clause (III) of such section begins, 
and’’. 
(2) Section 403(b)(7)(A)(ii) of such Code is 
amended by inserting ‘‘(unless such amount is a dis-
tribution to which section 72(t)(2)(G) applies)’’ after 
‘‘distributee’’. 
(3) Section 403(b)(11) of such Code is amend-
ed 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 sub-
paragraph (B) the following new subparagraph:
423
‘‘(C) for distributions to which section 
72(t)(2)(G) applies.’’. 
(c) EFFECTIVE DATE; WAIVER OF LIMITATIONS.—
(1) EFFECTIVE DATE.—The amendment made 
by this section shall apply to distributions after Sep-
tember 11, 2001. 
(2) WAIVER
OF
LIMITATIONS.—If refund or 
credit of any overpayment of tax resulting from the 
amendments made by this section is prevented at 
any time before the close of the 1-year period begin-
ning on the date of the enactment of this Act by the 
operation of any law or rule of law (including res ju-
dicata), such refund or credit may nevertheless be 
made or allowed if claim therefor is filed before the 
close of such period. 
SEC. 905. WAIVER OF 10 PERCENT EARLY WITHDRAWAL 
PENALTY TAX ON CERTAIN DISTRIBUTIONS 
OF PENSION PLANS FOR PUBLIC SAFETY EM-
PLOYEES. 
(a) IN GENERAL.—Section 72(t)(2) of the Internal 
Revenue Code of 1986 (relating to subsection not to apply 
to certain distributions), as amended by section 904, is 
amended by adding at the end the following new sub-
section:
424
‘‘(H) DROP DISTRIBUTIONS
TO
QUALI-
FIED PUBLIC SAFETY EMPLOYEES IN GOVERN-
MENTAL PLANS.—
‘‘(i) IN
GENERAL.—Distributions to 
an individual who is a qualified public safe-
ty employee from a governmental plan 
within the meaning of section 414(d) to 
the extent such distributions are attrib-
utable to a DROP benefit. 
‘‘(ii) DEFINITIONS.—For purposes of 
this subparagraph—
‘‘(I) DROP BENEFIT.—The term 
‘DROP benefit’ means a feature of a 
governmental plan which is a defined 
benefit plan and under which an em-
ployee elects to receive credits to an 
account (including a notional account) 
in the plan which are not in excess of 
the plan benefits (payable in the form 
of an annuity) that would have been 
provided if the employee had retired 
under the plan at a specified earlier 
retirement date and which are in lieu 
of increases in the employee’s accrued 
pension benefit based on years of
425
service after the effective date of the 
DROP election. 
‘‘(II) QUALIFIED PUBLIC SAFETY 
EMPLOYEE.—The term ‘qualified pub-
lic safety employee’ means any em-
ployee of any police department or fire 
department organized and operated by 
a State or political subdivision of a 
State if the employee provides police 
protection, firefighting services, or 
emergency medical services for any 
area within the jurisdiction of such 
State or political subdivision and if 
the employee was eligible to retire on 
or before the date of such election and 
receive immediate retirement bene-
fits.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to distributions after the date of 
the enactment of this Act.
426
SEC. 906. COMBAT ZONE COMPENSATION TAKEN INTO AC-
COUNT FOR PURPOSES OF DETERMINING 
LIMITATION AND DEDUCTIBILITY OF CON-
TRIBUTIONS TO INDIVIDUAL RETIREMENT 
PLANS. 
(a) IN GENERAL.—Subsection (f) of section 219 of 
the Internal Revenue Code of 1986 is amended by redesig-
nating paragraph (7) as paragraph (8) and by inserting 
after paragraph (6) the following new paragraph: 
‘‘(7) 
SPECIAL
RULE
FOR
COMPENSATION 
EARNED BY MEMBERS OF THE ARMED FORCES FOR 
SERVICE IN A COMBAT ZONE.—For purposes of sub-
sections (b)(1)(B) and (c), the amount of compensa-
tion includible in an individual’s gross income shall 
be determined without regard to section 112.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2005. 
SEC. 907. DIRECT PAYMENT OF TAX REFUNDS TO INDI-
VIDUAL RETIREMENT PLANS. 
(a) IN GENERAL.—The Secretary of the Treasury (or 
the Secretary’s delegate) shall make available a form (or 
modify existing forms) for use by individuals to direct that 
a portion of any refund of overpayment of tax imposed 
by chapter 1 of the Internal Revenue Code of 1986 be