The move is the latest attempt to block or limit President Donald Trump's decree to bar transgender personnel from serving "in any capacity," reversing a plan launched by his predecessor Barack Obama that would see the military accept openly transgender recruits.
"When less than one percent of Americans are volunteering to join the military, we should welcome all those who are willing and able to serve our country," said Republican Senator John McCain, chairman of the Senate Armed Services Committee.
McCain was one of four co-sponsors of the legislation. He was joined by Jack Reed, who is the senior Democrat on the Armed Services Committee, as well as Democrat Kirsten Gillibrand and Republican Susan Collins.
The legislation would block the Pentagon from firing or denying re-enlistment to any service member based on their gender identity, and require Defense Secretary Jim Mattis to complete a review of transgender recruits enlisting by the end of the year.
"If individuals are willing to put on the uniform of our country, be deployed in war zones, and risk their lives for our freedoms, then we should be expressing our gratitude to them, not trying to kick them out of the military," said Collins.
It is not yet clear when the measure will be voted on. But it could gain significant traction because of its bipartisan nature and the heft of its backers.
Earlier, the Pentagon said transgender personnel can keep serving and can re-enlist well into next year while the officials figure out how to implement Trump's ban.
Pentagon spokesman Colonel Rob Manning said Mattis had directed senior officials to develop a plan to implement Trump's ban, but it doesn't need to be submitted to the president until February 21, 2018.
"The implementation plan will establish the policy standards and procedures to address military service by transgender individuals ... consistent with military readiness, lethality, deployability and budgetary constraints and applicable law," Manning told reporters.
He said the Obama-era policy allowing transgender personnel to serve and receive medical treatment will remain in place for now.
"Transgender service members whose term expires while the (current) guidance is in effect may re-enlist under existing procedures," Manning said.
Trump's transgender ban has also sparked several legal challenges.
OutServe-SLDN - which works to end military discrimination - and civil rights litigators Lambda Legal have filed a lawsuit and on Thursday, retired admiral Mike Mullen, former chairman of the Joint Chiefs of Staff, threw his support behind the challenge.
"The military's prior considered judgment on this matter should not be disregarded and we should not breach the faith of service members who defend our freedoms, including those who are transgender," he said in a declaration.
