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The plan is adopted by an employer, and only the income from that employer can be counted. So, if the sole prop adopts a plan, any income received from another employer, whether W-2 or K-1, doesn't count for the sole prop plan (assuming no 414(m), (n), or (o) issues - controlled entities). It's highly unlikely that the 2% ownership will allow him to adopt a plan for that entity, so he has only his sole prop plan and only his sole prop income to take into consideration.

There's no fee to file VFCP with the DOL.

I've only had one client receive that letter so far. They had already completed most of the corrections, so we encouraged them to file under VFCP since DOL is clearly at least looking at these, and they got their no-action letter without any pain or suffering. In this case the amount of total late deposits reported on the 5500 was a substantial percentage of total employee contributions for the year, but the actual lost earnings amounts involved ended up being small. I have no anecdotal evidence of investigations and I'm hoping to keep it that way!

The tax question may be better for your accountant. Are you and your husband the only employees or just one the ones who will be eligible for the plan? If you have other employees are you sure they won't be eligible and if the become eligible are you comfortable covering them? Is your income stable or are you just having a good year? Would you be happy with putting $112K or less into a plan for you and your husband or do you want to make larger contributions? If the former you can probably do it with a SEP or 401(k) if you want to put away more a DB plan might be right for you as you could get much larger contributions depending on Plan design. My advice would be to find a local actuary and have them do a study for you.

For what it's worth, since it was set up as a multiple employer plan, I would check the multiple employer box and report the one company making 100% of the contributions. I think avoids any future issues when the next return is filed.

Agreed. A damned righteous consequence for incompetence.