There is no exclusive plan rule for a Solo 401(k) Plan and SEP IRA. Only a SIMPLE IRA has an exclusive plan rule, meaning one can not combine a Solo 401k Plan with a SIMPLE IRA. Even though one can have a SEP along with a Solo 401(k) plan, there is generally not many benefits of having both plans established for a business. The reason behind this is that the Solo 401(k) Plan provides participants with more advantages than a SEP IRA. For example, a SEP IRA only includes an employer profit sharing component (20% of compensation for the self-employed and 25% for S and C Corporations), whereas, a solo 401(k) plan, also known as an individual 401(k) plan, includes an employee deferral component ($17,000 if you are under 50 or $22,500 if you are over 50) plus an employer profit sharing contribution option. Hence, it typically does not make much sense to have both a SEP IRA and a Solo 401(k) Plan since the Solo 401(k) Plan, also known an individual 401K offers the plan participants higher deferral options, plus additional features such as a $50,000 tax and penalty free loan.
Therefore, even though a business can have both a SEP IRA and a solo 401(k) plan, there is not much of an advantage of having both plans since the solo 401(k) plan will offer all the advantages of a SEP, plus many additional benefits. One obvious benefit is the higher contributions options. Take for example, an individual who owns a single member LLC. Assuming, the individual earns $100,000 in W-2 income for the year and his over the age of 50. A SEP IRA would only allow that individual to defer 20% of his compensation of $20,000. With a Solo 401(k) Plan, that individual would be able to defer $22,500 as an employee deferral plus an additional 20% of his or her compensation, giving that individual approximately $42,500 for the year. More than double the amount of a SEP IRA. In addition, that individual will have the ability to borrow $50,000 or 50% of his or her account value and use that loan for any purpose.