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SECTION 1. SHORT TITLE.

This Act may be cited as the ''Uniformed Services Differential Pay
Protection Act''.

SEC. 2. INCOME TAX WITHHOLDING ON DIFFERENTIAL WAGE PAYMENTS.

(a) In General.--Section 3401 of the Internal Revenue 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.
''(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 individual with
respect to any period during which the individual is
performing service in the uniformed 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 employer 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. 3. 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 relating to veterans'
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 subsection applies--
''(i) an individual receiving a
differential wage payment shall be treated as
an employee of the employer making the payment,
''(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 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
individual shall be treated as having been
severed from employment 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 deferral 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
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 '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 ''and to Differential Wage
Payments to Members 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 (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 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 Security Act of 1974 by
reason of such amendment.
(2) Amendments to which section applies.--
(A) In general.--This subsection shall apply to any
amendment to any plan or annuity 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 amendment unless--
(i) during the period beginning on the date
the amendment described in subparagraph (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 contract is operated as
if such plan or contract amendment were in
effect; and
(ii) such plan or contract amendment
applies retroactively for such period.
Output:
Uniformed Services Differential Pay Protection Act - Amends the Internal Revenue Code to treat differential wage payments as a payment of wages by an employer to an employee for income tax purposes. Defines "differential wage payment" as any employer payment to an individual serving on active duty in the uniformed services for more than 30 days which represents wages such individual would have received if such individual were performing services for the employer.

Treats an individual receiving differential wage payments as an employee and treats differential wage payments as compensation for retirement plan purposes.