controlled group - safe harbor 401k plan

In the case of a controlled group where one company is covered by the plan and the other is not.  Is it the case that as long as we pass coverage, the 2nd company can be excluded?

The short answer is yes, but the short answer belies the complexity that can be involved in performing coverage testing.  For example, common usage of the word "plan" makes us think of a plan document and all of the provisions in that document.  In the context of coverage testing, elective deferrals are a plan, matching contributions are a plan, and employer non-elective contributions are a plan.  If any one of these plans fails, there is a coverage problem.

Another example is each of these coverage tests looks at a population of nonexcludable and excludable employees.  This determination is made employee by employee and not at a company level.  Any nonexcludable employee will play a part in a coverage test and any excludable employee will not.

Coverage testing, like other compliance testing, allows for many paths to get to a passing result.  Some paths are relatively easy, other paths can be exceptionally complex, and the plan document may preclude using some paths or even mandate how a coverage failure must be corrected.

If you are experienced with coverage testing, then you will recognize the situations alluded to in the comments above.  Otherwise, find a mentor, colleague or outside assistance to work with you on performing the coverage tests.

Thank you Paul for your detailed answer.  I really appreciate it!  I am skilled at testing and I just wanted to make SH rules are still valid when there is an excluded group in the other company.

Maybe now you can educate me... what SH rules you are referring to?