SEP IRA vs Solo 401k Plan
Both Considered Defined Contribution Plans
As solo 401k and a simplified employee plan (SEP)are both types of defined contribution plans for the self-employed. As SEP IRA is funded exclusively with employer contributions, whereas a solo 401k plan can be funded with both employer and employee contributions.
Earned income means the same for both the SEP IRA and the solo 401k plan.
For self-employed persons, compensation means “earned income” based on the individual’s Schedule C to the Form 1040 (or schedule K-1 for partners in partnerships), as adjusted for the deduction for one half of self-employment taxes (Schedule SE) and the contribution to the SEP. Because of that adjustment, the self-employed will use a figure of 20% of the net business income minus one-half of the self-employment taxes to be equivalent to 25% of includible compensation.
To adopt a solo 401k plan, various pan documents apply such as, Adoption Agreement, Trust Agreement, Basic Plan Document and Entity Consent. To establish a SEP plan, the employer may either adopt the IRS Form 5305-SEP as its SEP, or it may adopt a prototype SEP plan.
Exclude Certain Employees
Both contractors and nonresident aliens may be excluded from both the SEP and the solo 401k plan.
No Form 5500-EZ
Since SEPs are not subject to the reporting and disclosure portions of ERISA, Form 5500-ez is not required. On the other hand, Form 5500-ez applies to solo 401k plans once the total value of the plan exceeds $250,000.
Contributions to both SEP IRAs and Solo 401k plans are are immediately owned by the participant. Therefore, vesting does not apply.
No Participant Loans
Since SEPs are funded through IRAs, all IRA rules apply. Therefore, participants cannot take loans from SEPs. However, solo 401k plans may allow for participant loans.