The employer of a friend has denied her the participation in their
401-K program, saying she was a 1099 contractor. The issue is under
litigation and will not be resolved in the near future. The company
has also refused to conform with two IRS rulings that she was an
employee. IRS says she certainly was a W-2 employee and requires her
and company to comply with tax rules as an employee.  Everybody else
in the company - with same credentials - participates in the company
401-K plan, but she can't - unless court rules otherwise. Can she
set-up and contribute to a SEP-IRA? Can she create a one person 401K?
What are her options for a retirement plan given unusual
circumstances?

Does the employer make a matching contribution into the 401K?  If not,
an employee may do better to begin by making the maximum contribution
to a Roth IRA account.  Contributions to other types of retirement
vehicles in addition to that are fine, provided that you have enough
money to maximize your Roth IRA contribution.

On the other hand, if there is an employer match on 401K
contributions, then the 401K is probably your best starting point, at
least up to the matching allowance.

I have provided this as a comment, since I recognize it does not
address the main issue of your question.

http://www.taxgaga.com/pages/c-investments/whyrothisbetter.html

http://moneycentral.msn.com/articles/retire/invest/4899.asp

http://moneycentral.msn.com/articles/tax/basics/1602.asp