A Company has two divisions one with 80 employees and the other with 20. They include in their Document that the second division's employees are excluded from the Plan. Therefore, they are not given the option to do their own deferrals either.

At the end of the year it is discovered that there were only 20 employees at the beginning of the year in each of the two companies (there are no HCEs in either). So we now discover that coverage and participation is NOT satisfied. We obviously need to include the 2nd division in ADP/ACP testing. But what about the fact that they were prohibited from deferring when, in reality, they needed to be included?

I know there is a corrective method if you accidentally prohibit someone from participating. But here it was actually in the Document.

Any advice? Thanks in advance.

If I'm reading this right, I'm having trouble understanding your concern. If there is a plan that covers only NHCE's, it passes coverage automatically. Am I missing something?

The excluded division is not included in the ADP or ACP test because they are excluded. However they are included in the coverage test.

You are 100% correct. I was stating some overly simple facts for ease of explaining my situation. There are also HCEs. So what I am trying to ascertain is that if I didn't allow them to participate at the beginning of the year because the Document specifically excluded them but now I see that, with the exclusion, C&P is not satisfied, I have withheld from them the opportunity to defer.

I guess I have to make a retroactive amendment to allow them to participate (is that just for one year), and then give them a QNEC equal to the average ADP for those NHCEs that deferred. But you don't think I then need to include them in ADP/ACP testing?

you indicated you fail coverage, so you only need to provide a QNEC to enough NHCEs to pass coverage. the QNEC = the average of the NHCEs.
now, if you were to include these 'added' NHCEs in the test, since they received the avg of the NHCEs, then the ADP test should end up at the same average, so it really shouldn't matter.
e.g. if the avg for 10 NHCEs was 4% and I add 1 NHCE at 4%, the avg will still be 4%.

Because you simplified, confusion abounds. I read your OP that NO HCEs in either company were eligible for the plan, that they were excluded. If NO HCEs benefit under the plan you get an automatic pass for coverage and participation.

Are you saying that HCEs were eligible for only one of the plans? Both of the plans? In a 401(k), coverage is usually very easy to pass since any eligible is considered to be benefitting. ADP/ACP testing is another matter.