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Check the BPD - it should say that for a self-employed individual their compensation is their net earned income from self-employment, so whatever AA option gets checked I don't think it matters much.

Exactly! Whenever I see the phrases "husband and wife" and "cash balance" and "overfunded", I wonder if the last one is true. Has there been a real 415 test? A consulting actuary would ask lots of questions, which might include: Why is a husband/wife plan structured as cash balance rather than traditional DB? Do the participant(s) have health status that impairs insurability? What is the magnitude of any "overfunding"? What are the ages of the participants? How soon do the participants plan to retire/cease working? Are there others (e.g., children) that might join the business? Do the participants plan to choose a lump sum distribution (at some later date) or choose a J&S payment form? Does the business also have a DC plan? A really good consulting actuary will explain to the plan sponsor how these questions are inter-related.

Putting insurance in a pension plan is usually a great idea if you are the agent making the sale. Your client should talk to their accountant and/or financial advisor (not the one selling him/her the insurance) and determine if it makes sense from a long term financial perspective. It might be a great idea, but more likely a its a horrible idea.