"I think this plan is different from the traditional 401K? I am really confused."

If the husband also works for the business, they should both be on payroll. If he is only a Shareholder and does no work, then he gets no pay, and not being on payroll is fine. You didn't describe if he works for the business or not.

The reason this type of plan is different from a "regular" 401(k) plan is that there is no discrimination testing requirement if the entity has only the shareholder-employee, or that person + that person's spouse. Otherwise, you have comply with DOL testing to avoid favoring highly compensated employees.

Perhaps the spouse should have had a SEP IRA.