controlled group coverage exception

[Santo Gold]

Mr. X owns 100% of two companies. Both companies participate in one 401(k) plan that has equal benefits for employees of both companies. There are a total of 15 employees between the two companies.

Mr. X now is starting a 3rd business, in 2009, again he is the 100% owner. He would like to not have to provide retirement benefits for this group for a few years. There are to be 7 employees in this company, at least 1 will be an HCE.

I know that when a business is acquired, there is a transition rule that allows for the acquired company's employees to be excluded from testing in the controlled group for up to 2 years. Does that same exemption apply to a newly created company? If so, does that mean that these employees of the new company would not count in the 410(b) test until 2011?

Twist: It is expected that the seven employees of the new company will come from the employee pool of the other 2 companies. A tough sell for sure to any employees making that switch. But, does that change the above applicability of the transition rule? Would they still have until 2011 before counting them?

Thanks

[Santo Gold]

I believe I answered my own question. The transition rule applies to acquisitions. No mention is made of newly created subsidiaries. It would seem that subsidiaries would not be included in the transition rule because the potential would be there for abuse (i.e., having a bunch of NHCEs moved to the new company, not covering them for up to 2 years).