Members of the Senate Finance Committee have come up with a bill that could make it easier for employers to provide extra pay for reservists called up for active duty.

Sen. Max Baucus, D-Mont., chairman of the committee, has joined with Sen. Charles Grassley, R-Iowa, the most senior Republican on the committee, to introduced the Defenders of Freedom Tax Relief Act.

The bill number was not available at press time.

One major provision would create a permanent provision to replace the temporary law that now permits soldiers to include non-taxable combat pay when figuring eligibility for the earned income tax credit.

Another provision would change the tax rules for employers that offer extra military leave pay for reservist employees who are called up for active duty.

The employees could treat the payments as wages and report them on Form W-2, rather than on Form 1099, officials say.

Some of the provisions of the bill with benefits implications would:

- Permit the families of soldiers killed in the line of duty to contribute up to 100% of survivor benefits to a Roth individual retirement account.

- Allow active-duty troops to withdraw money from retirement plans and give them 2 years to replace the funds without tax penalty.

- Give the Internal Revenue Service the authority to treat gifts of thanks from states to veterans–such as payments of excess state revenue–as nontaxable gifts.

- Create a tax credit for small employers of reservists and guard members called up for active duty. The proposal would give small businesses with fewer than 50 employees help with supplying “differential pay,” which can help activated employees make up the difference between their civilian pay and military pay. The new bill would create a tax credit for up to 20% of the first $20,000 in differential pay for each activated employee.

- Create a permanent provision allowing for penalty-free withdrawals from retirement plans for reservists called to active duty. Congress enacted a temporary version of this provision in 2006, but the temporary version expires at the end of the year.