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It seems that the issue here is the "alternative defined contribution plan" rule under 1.401(k)-1(d)(4). You say that the 2 subs were not participating in the original 401(k) plan sponsored by another entity in the controlled group. If the subs were not participating employers in the original 401(k) plan, their employees were not eligible under the original 401(k) plan which terminated. Therefore, it would seem that starting a new 401(k) plan under which ONLY the subs would be eligible would be permitted because the new plan would not be an alternative defined contribution plan because the employees eligible under the new plan were not eligible under the original 401(k) plan. Am I missing something?

Nope. the two businesses are a controlled group, and as such, the owner is already maxed out. Now, I'm assuming when you say "contributed the max profit sharing" that you mean they maxed out on the full 415 limit dollar amount. If not, there may be room for a contribution - but you can't use an IRS model SEP, you'd have to use a prototype SEP that allows it.

If potential large filer under 403b, would they be a potential large filer under the 401k? You can't force the 403b money into the 401k, the employees would have to individually initiate the rollover. Would you be losing a huge advantage of no ADP testing? I've seen some 403b's to be a lot of low pay no deferring type of plan.

Count me in! Can we add a session on "my payroll company said they would do my plan for free"?

Trustee did what the participant directed. Whether participant checked the wrong box or not, that's the box he checked. He doesn't get a Mulligan in this game. Trustee clearly does NOT have the ability to reverse it.

From 1.401(m)-2. This is the big issue! (iii) Matching contributions. A matching contribution is taken into account in determining the ACR for an eligible employee for a plan year or applicable year only if each of the following requirements is satisfied— (A) The matching contribution is allocated to the employee's account under the terms of the plan as of a date within that year; (B) The matching contribution is made on account of (or the matching contribution is allocated on the basis of) the employee's elective deferrals or employee contributions for that year; and (C) The matching contribution is actually paid to the trust no later than the end of the 12-month period immediately following the year that contains that date.

Bird, we have a special psychotherapy session to the ASPPA annual for just this situation; it's always a big fun party!

Yes, you would need to amend the plan to give credit for prior service with the other employer.