Overview of key structural distinctions under federal retirement plan rules
Quick Summary / Key Takeaways
- Solo 401(k) plans are employer-sponsored retirement plans that may permit both employee elective deferrals and employer contributions, subject to applicable federal tax rules, including elective deferral limits under Internal Revenue Code §402(g) (2026 elective deferral limit: $24,500).
- SEP IRAs permit employer-only contributions made to individual retirement accounts established under Internal Revenue Code §408 for eligible participants.
- Solo 401(k) plans are generally limited to businesses with no employees other than the owner and the owner’s spouse.
- Solo 401(k) plans may permit age-based catch-up contributions for participants age 50 or older under federal retirement plan rules, including provisions under Internal Revenue Code §414(v) (2026 catch-up limit for eligible participants: $8,000 – $11,250 dependent on age).
- SEP IRA contributions are generally made by the employer and may be established and funded within the timeframe permitted under applicable federal tax filing deadlines.
Introduction
Self-employed individuals and small business owners may establish retirement plans that are governed by federal tax rules. Two structures commonly discussed in this context are the Solo 401(k) plan and the SEP IRA.
A Solo 401(k) is an employer-sponsored retirement plan designed for businesses with no employees other than the owner and, where applicable, the owner’s spouse. The plan structure may permit both employee elective deferrals and employer contributions, subject to applicable federal retirement plan rules, including elective deferral provisions under Internal Revenue Code §402(g).
A SEP IRA (Simplified Employee Pension Individual Retirement Account) is an employer-funded retirement arrangement established under Internal Revenue Code §408. Contributions to a SEP IRA are made by the employer on behalf of eligible participants.
These retirement plan structures operate under different contribution rules, eligibility conditions, and administrative requirements. Understanding the structural differences between a Solo 401(k) plan and a SEP IRA may help clarify how each plan functions under federal retirement plan rules.
Solo 401(k) and SEP IRA: Core Structural Comparison
| Feature | Solo 401(k) | SEP IRA |
|---|---|---|
| Contribution Structure | May permit both employee elective deferrals and employer contributions under applicable federal retirement plan rules | Employer-only contributions made to individual retirement accounts established under Internal Revenue Code §408 |
| Contribution Limits | Subject to elective deferral limits under Internal Revenue Code §402(g) (2026 limit: $24,500) and total plan contribution limits under Internal Revenue Code §415(c)(1)(A) (2026 limit: $72,000) | Subject to elective deferral limits under Internal Revenue Code §402(g) (2026 limit: $24,500) and total plan contribution limits under Internal Revenue Code §415(c)(1)(A) (2026 limit: $72,000) |
| Establishment Deadline | Generally established by the end of the employer’s tax year, subject to applicable retirement plan rules | Generally established by the end of the employer’s tax year, subject to applicable retirement plan rules |
| Age-Based Catch-Up Contributions | May permit catch-up contributions for participants age 50 or older under Internal Revenue Code §414(v) (2026 catch-up limit: $8,000 – $11,250 dependent on age) | SEP IRAs do not provide age-based catch-up contribution provisions |
| Participant Loans | Certain Solo 401(k) plans may permit participant loans when allowed under plan documents and applicable federal retirement plan rules | SEP IRAs do not permit participant loans |
Solo 401(k) and SEP IRA: Eligibility and Administrative Structure
| Requirement | Solo 401(k) | SEP IRA |
|---|---|---|
| Employee Eligibility | Limited to businesses with no employees other than the owner and, where applicable, the owner’s spouse | Employers may establish SEP IRAs for eligible employees in accordance with federal retirement plan rules under Internal Revenue Code §408 |
| Administrative Filings | Certain plans may require annual reporting such as Form 5500 when plan assets exceed applicable federal reporting thresholds | SEP IRAs generally do not require annual Form 5500 reporting |
| Contribution Structure | May permit employee elective deferrals and employer contributions under applicable federal retirement plan rules | Contributions are made by the employer to individual retirement accounts established |
| Roth Contribution Option | Certain Solo 401(k) plan documents may permit Roth elective deferral features | SEP IRAs now feature a Roth provision thanks to the SECURE Act 2.0. |
| Administrative Structure | The plan sponsor and service providers typically perform plan administration | SEP IRA administration involves employer contributions to IRA accounts held by a qualified IRA custodian |
Solo 401(k) Plan: Establishment Preparation
- Confirm that the business has no employees other than the owner and, where applicable, the owner’s spouse, subject to applicable Solo 401(k) eligibility rules under federal retirement plan regulations.
- Obtain an Employer Identification Number (EIN) from the Internal Revenue Service when required for plan establishment and reporting purposes.
- Select a financial institution or service provider that provides plan administration or custodial services for the selected retirement plan structure.
- Execute the plan adoption agreement and related documentation within the timeframe permitted under applicable federal retirement plan rules.
Ongoing Administrative and Reporting Considerations
- Determine contribution amounts in accordance with applicable federal retirement plan rules, including overall contribution limits and elective deferral limits.
- File Form 5500-EZ when plan assets exceed applicable federal reporting thresholds.
- Maintain and update plan documents when required.
- Review plan records and related documentation periodically as part of routine plan administration.
Table of Contents
Section 1: Basics and Eligibility
Section 2: Contribution Limits
Section 3: Deadlines and Setup
Section 4: Advanced Features
Frequently Asked Questions
Section 1: Basics and Eligibility
FAQ 1: What is the structural difference between a Solo 401(k) and a SEP IRA?
The primary difference between a Solo 401(k) and a SEP IRA relates to how contributions are structured under federal retirement plan rules.
A Solo 401(k) is an employer-sponsored retirement plan that may permit both employee elective deferrals and employer contributions, including elective deferral provisions under Internal Revenue Code §402(g) and overall plan contribution limits.
A SEP IRA is an employer-funded retirement arrangement established under Internal Revenue Code §408. Contributions to a SEP IRA are generally made by the employer to individual retirement accounts held by a qualified IRA custodian.
Because of these structural differences, Solo 401(k) plans and SEP IRAs are subject to different contribution limits and administrative requirements.
FAQ 2: Can employees participate in a Solo 401(k) or SEP IRA?
Eligibility rules differ between Solo 401(k) plans and SEP IRAs under federal retirement plan regulations.
A Solo 401(k) plan is generally limited to businesses with no employees other than the owner and the owner’s spouse.
If a business has employees who meet applicable age and service requirements under federal retirement plan rules, a Solo 401(k) plan may no longer meet the eligibility conditions associated with owner-only plan structures.
SEP IRAs permit employer contributions to individual retirement accounts established for eligible employees. These accounts are held by a qualified IRA custodian that holds and titles IRA assets, or through a qualified administrator that maintains required records, and issues applicable IRS reporting forms, including Form 5498 and Form 1099-R where relevant.
When employers make contributions to a SEP IRA, contributions are generally required to be made using the same percentage of compensation for each eligible participant under applicable federal retirement plan rules.
Section 2: Contribution Limits
FAQ 3: How are contributions structured in a Solo 401(k)?
A Solo 401(k) plan may permit two types of contributions under federal retirement plan rules: employee elective deferrals and employer contributions.
For the 2026 tax year, the elective deferral limit under Internal Revenue Code §402(g) is $24,500. Participants age 50 or older may also be eligible to make catch-up contributions of $8,000 to $11,250, depending on their age.
Employer contributions may also be made based on business income, subject to the overall defined contribution annual additions limit under Internal Revenue Code §415(c)(1)(A), which is $72,000 for 2026.
Contribution calculations depend on factors such as compensation structure and business income and must follow applicable federal retirement plan rules.
FAQ 4: How are SEP IRA contribution limits calculated under federal retirement plan rules?
SEP IRA contributions are based on a percentage of compensation or net self-employment income, subject to applicable federal retirement plan limits.
Employers may contribute up to 25% of eligible compensation, subject to the defined contribution annual additions limit under Internal Revenue Code §415(c)(1)(A), which is $72,000 for the 2026 tax year.
For self-employed individuals, contribution calculations are based on net self-employment income after adjustments, including the deduction for self-employment tax.
Unlike a Solo 401(k), a SEP IRA does not include employee elective deferrals or age-based catch-up contributions.
SEP IRA custodial structure
SEP IRA accounts are held by a qualified IRA custodian that holds and titles IRA assets, or through a qualified administrator that maintains required records, and issues applicable IRS reporting forms such as Form 5498 and Form 1099-R where relevant.
Section 3: DEADLINES AND SETUP
FAQ 5: When must a Solo 401(k) plan be established under federal retirement plan rules?
A Solo 401(k) plan must generally be established by the end of the tax year for which employee elective deferrals are intended to apply. For calendar-year taxpayers, this typically means the plan adoption agreement must be executed by December 31 of the applicable tax year.
Certain administrative timelines and contribution procedures may vary depending on applicable retirement plan rules and plan documentation.
In comparison, a SEP IRA may be established and funded up to the employer’s federal tax filing deadline, including extensions, in accordance with applicable federal tax rules.
FAQ 6: Is the administrative structure of a SEP IRA different from a Solo 401(k)?
Administrative requirements differ between SEP IRAs and Solo 401(k) plans under federal retirement plan rules.
A SEP IRA is established through individual retirement accounts created under Internal Revenue Code §408. These accounts are held by a qualified IRA custodian that holds and titles IRA assets, or through a qualified administrator that maintains required records, and issues applicable IRS reporting forms such as Form 5498 and Form 1099-R where relevant. SEP IRA arrangements do not require annual plan-level reporting, such as Form 5500 or Form 5500-EZ.
By comparison, Solo 401(k) plans may require additional administrative procedures under federal retirement plan rules. For example, certain Solo 401(k) plans must file Form 5500-EZ when plan assets exceed applicable federal reporting thresholds.
Section 4: ADVANCED FEATURES
FAQ 7: Do Solo 401(k) plans and SEP IRAs permit participant loans?
Loan provisions differ between Solo 401(k) plans and SEP IRAs under federal retirement plan rules.
Certain Solo 401(k) plan documents may permit participant loans in accordance with applicable federal retirement plan provisions. When permitted, plan loans are generally limited to the lesser of 50% of the participant’s vested account balance or $50,000 and must be repaid in accordance with applicable repayment terms defined under federal retirement plan rules.
SEP IRAs do not permit participant loans. SEP IRA accounts are individual retirement accounts established under Internal Revenue Code §408.
Withdrawals from SEP IRAs may be subject to income taxation and may also be subject to additional tax considerations if distributions occur before retirement age, which is 59.5.
FAQ 8: How do tax treatment options differ between Solo 401(k) plans and SEP IRAs?
Tax treatment differs between Solo 401(k) plans and SEP IRAs under federal retirement plan rules.
Solo 401(k) plans may permit employee elective deferrals and employer contributions, subject to applicable federal retirement plan limits. Participants age 50 or older may also be eligible for catch-up contributions of $8,000 to $11,250, depending on their age.
Solo 401(k) plan documents may also permit Roth elective deferral features, provided they are allowed under applicable retirement plan rules. Roth contributions are generally made with after-tax income.
SEP IRAs are employer-funded retirement arrangements established under Internal Revenue Code §408. Contributions are generally made on a pre-tax basis to individual retirement accounts established for eligible participants and held by a qualified IRA custodian or administrator. SEP IRAs now have a Roth provision thanks to the SECURE Act 2.0.
