You do understand correctly. First, with a solo 401k, as you noted, subject to other limitations, it is possible to contribute up to your Schedule C income minus half self-employment tax. With a SEP, you are limited to 18.59% of your net Schedule C income, so you'd be able to take at least a partial health insurance deduction.
While taking either deduction serves the purpose of eliminating (at least for the current year) paying any federal income tax from self-employment income (still have to pay self-employment tax), at least the solo 401k gives you the opportunity to earn something on the money.
