A spouse on payroll makes a two-person plan, not a loophole.

The owner-only plan is a clean picture. One person, one benefit, no staff cost, a short census. Then a spouse starts answering the phone, keeping the books, or seeing patients one day a week, and someone suggests putting the spouse on payroll so the retirement plan can be larger. Sometimes that suggestion is sound. A spouse who does real work, at a wage that matches the work, can be a real participant with a real benefit, and the mathematics of a defined benefit plan can support a larger combined contribution than the owner alone could take. Sometimes the suggestion is a sketch of a second contribution with a token wage underneath it. The plan will not cooperate with the sketch. Payroll taxes, attribution rules, and the document all assume the second person is an employee, not a label.

This briefing is about the difference. It is for a practice that is, or is about to be, a two-person plan: the owner and the spouse, and nobody else. The moment a third person is a common-law employee, you have left this fact pattern and entered ordinary coverage. Sterling Pension Group administers both. We are a third-party administrator in West Hartford, not an actuarial firm. An independent Enrolled Actuary certifies the funding. We will not illustrate a spousal benefit on a wage that exists only in the planning memo.

The spouse is a participant, or is not

A retirement plan covers employees. A spouse becomes an employee by doing services for the business and being paid for them, under the same rules that apply to anyone else. A wage that is reasonable for the services can be plan compensation. A wage that is a round number chosen because it maximizes a credit, with no relationship to the work, is a problem for employment tax and for the plan at the same time. The IRS has spent years on S corporation officers who take distributions instead of wages. It is not more sympathetic to a spouse's wages that were never earned.

What the spouse receives from the plan is the spouse's benefit. It is not a second pocket of the owner's benefit. In a cash balance plan the spouse has a hypothetical account. In a traditional defined benefit plan the spouse has an accrued benefit. Those amounts are paid to the spouse under the terms of the plan, subject to the joint-and-survivor rules that apply when a participant is married, and they are part of the spouse's retirement, including in a divorce. Owners who think of the combined contribution as "our family deduction" are not wrong about the tax year. They are wrong if they think the second account can be folded back into the owner's name when it is convenient.

Compensation follows the entity. If the practice is an S corporation, the spouse's plan compensation is W-2 wages, capped like any other participant. For 2025 the cap is $350,000. Distributions to the owner do not become the spouse's compensation, and the spouse's wages do not become the owner's. If the practice is a sole proprietorship, a spouse who is a bona fide employee is paid as an employee, and the owner's own compensation is earned income, not a wage. Those are different numbers on the census. Mixing them is how illustrations overstate both people. Publication 560 walks through small-business plan compensation in the IRS's own terms. It is the right handout for a bookkeeper who has one column labeled "family."

The 2025 limits apply to each participant, not to the household as a blended maximum. Elective deferrals, if the plan has a 401(k) feature and the spouse is eligible, are $23,500 for the spouse and $23,500 for the owner. The catch-up is $7,500 at age 50, or $11,250 if the participant attains age 60, 61, 62, or 63 during the year. The higher catch-up replaces the $7,500. It is not added to it. Annual additions other than catch-up are $70,000 per participant. The defined benefit dollar limit is an annual benefit of $280,000 per participant, reduced for early commencement and for short participation, as the IRS explains on its benefit limits page. Two people do not create a household benefit limit of twice $280,000 that you may assign as you like. Each person has a limit, measured on that person's age, pay, and service. The COLA table and IR-2024-285 are the sources for the dollar figures. None of them is a contribution you are entitled to deposit just because a spouse was added to payroll.

What changes when the plan is no longer one person

A plan that covers only an owner, or only partners and their spouses, can often file Form 5500-EZ rather than the longer Form 5500. Adding a spouse who is the owner's spouse does not, by itself, force the long form. Adding an employee who is not an owner and not a spouse does. The practical change is still real. There are two census records, two compensation figures, two benefit calculations, and two sets of dates. Eligibility has to be applied to the spouse the way the document applies it to anyone. Hours, date of hire, and age are not formalities because you share a household.

Controlled group and affiliated service group rules are where "just the two of us" quietly ends. Ownership between spouses is often attributed. The attribution rules have a narrow exception for spouses who do not participate in each other's businesses and who meet the other statutory conditions. A spouse who works in the practice usually cannot use that exception. The result is that a business the spouse owns, and a business the owner owns, may be treated as one employer. A medical practice and a spouse's consulting LLC, or a dental practice and a rental company that is not actually a separate employer under the rules, can pull employees from both sides into one test. The plan you thought was two people may be required to consider eight. Staff cost is the page that describes the consequence. The consequence is contributions for people who do not live in the house.

This is also why a physician's or a dentist's household needs a fuller inventory than a wage for the front desk. Related entities are part of the census even when they have their own bank accounts. We would rather see an entity that turns out not to be in the group than discover it after the actuary has certified a contribution that assumed it did not exist.

PBGC coverage is a separate question and it is plan-specific. A defined benefit plan maintained exclusively for substantial owners is generally exempt. A professional service employer that has never had more than 25 active participants may be exempt, and many small professional practices are. Neither sentence means that every two-person household plan is exempt, and neither sentence means that adding a spouse is irrelevant. A spouse who is a participant and who is not a substantial owner can take the plan out of the substantial-owner exemption. Whether a particular spouse is a substantial owner depends on ownership, including the way the statute counts ownership, not on the fact of the marriage. Do not guess. The coverage question gets its own briefing later this year. For now, do not let anyone tell you the plan is "obviously exempt" because it feels like a family plan.

The illustration has to be two illustrations

An owner-only illustration that is then "grossed up" for a spouse is not a two-person illustration. The spouse's age matters as much as the owner's. A spouse who is 45 does not have the same benefit capacity as a spouse who is 63, even at the same wage. A spouse with three years of real service is not in the same place as a spouse hired in April so that a credit can be taken in December. Participation years affect the 415 limit. Hours affect eligibility. A midyear hire may accrue nothing in the year of hire if the document requires a year of service, which is a result owners experience as a surprise and the document experiences as its own text.

Use illustrative numbers only as a warning about scale. Suppose the owner is 60 with wages at the $350,000 cap, and the spouse is 58 with wages of $80,000 for genuine half-time clinical or management work. A combined defined benefit illustration might show a much larger deposit than the owner alone, because there are two benefits, and it might also show that the spouse's own credit is modest next to the owner's because the wage is $80,000. Suppose instead the spouse is 38 with a $40,000 wage for occasional administrative work. The second benefit may add little, and the wage may not be reasonable if the work is occasional. Both pictures are made up. Neither is an IRS maximum. Both are better than a single combined number with no ages attached. More illustrative ranges belong in a real census, not in this paragraph.

A 401(k) combined with the pension does not change the employment facts. It does give each person a deferral, if each is eligible and each has wages to defer from. The spouse cannot defer from the owner's W-2. The owner cannot defer from the spouse's. Elections belong on each person's payroll. A household that wants the catch-up should look at each person's age. One spouse at 61 has the $11,250 catch-up. The other, at 52, has $7,500. They do not share the higher figure.

Deductions follow the employer's return. A contribution for both people is still an employer contribution, generally deducted by the practice, subject to the defined benefit deduction limits and to section 404(a)(6) timing. Your CPA has to be willing to sign the return. Paying the spouse also means employment tax, workers' compensation, and a real payroll filing. Those costs are part of the decision. A pension illustration that ignores the payroll cost of the wage that supports it is incomplete even when the pension arithmetic is right.

What we will and will not assume

Sterling Pension Group will administer a two-person plan with the same calendar as any other small plan: document, census, eligibility, coordination with the Enrolled Actuary, Form 5500 series, and the notices the document requires. We will not treat a spouse as a participant because it improves the illustration. We will ask what the spouse does, when the spouse started, how many hours, and what the wage will be. We will ask what else either of you owns. Those questions are the administration, not a hurdle in front of it.

A self-employed owner who has no employees and whose spouse does not work in the business should stay with an owner-only design. Adding a payroll that is not real in order to decorate the contribution is the kind of step that looks clever in a seminar and expensive in an examination. If the spouse already works, the honest version is simpler. Put the real wage on the census and let the actuary value two benefits.

This briefing is not tax, legal, or actuarial advice. Reasonable compensation, attribution, and whether a person is an employee are not questions a third-party administrator answers for you. The certified contribution is not ours to sign.

What to do in the next two weeks

If your spouse works in the business, write a short description of the work, the date it started, the hours in a normal month, and the wage you are actually paying through payroll. Attach the year-to-date payroll register. If the wage is still a proposal, mark it as a proposal and do not send it to an actuary as a fact.

List every entity either spouse owns, even the dormant ones. Note which entities have employees. If you are relying on the idea that the businesses are unrelated, write down why, and then ask counsel whether the attribution exception actually applies to a spouse who works in the practice.

If the spouse does not work in the business, resist the suggestion to invent a salary before year-end. Ask instead what the owner's own compensation can support. A smaller, cleaner plan is a better outcome than a two-person file that payroll cannot defend.

When the page is honest, bring it to us. We will tell you whether you have an owner-only plan, a genuine two-person plan, or a controlled group that has not been counted yet. The contribution comes after that, not before.