We currently sponsor a 401(k) (individually designed) - and recently purchased assets of another organization (assets only that we are setting up as a division that is wholly owned by buyer - not as a separate entity).

Aside from the discrimination issues, is there a problem with offering the employees who come with the new assets (division) a separate 401(k) plan covering just those employees? I know you can if it is a separate legal entity, but wasn't sure if the division throws that out of whack?

Coverage testing would pass for 401(k) feature only, but if the plans differed where one offers match or profit sharing but the other didn't you may not pass coverage testing.
When you acquire a company you have until the plan year after the plan year of purchase to make sure you pass coverage.

I was looking at TR 1.410(b)-2(f) - which I think is the transition rule (see below). However, it seems to apply to all fo 410(b) - is there something that modifies this? I know I am not familiar with every piece of guidance and wanted to find out what I am missing For instance, what if the plans had different 401(m) and profit-sharing contributions (kind of a practical question of how this works in real life versus what the regulation says)? Sorry if this is too basic of a sub-question (especially when I didn't even start the topic)

Also - would the transition rule apply to the new plan because it appears that the old plan would not be modified, but a new plan would be created?

Text of TR 1.410(b)-2(f) Certain acquisitions or dispositions. Section 410(b)(6)©
(relating to certain acquisitions or dispositions) provides a special
rule whereby a plan may be treated as satisfying section 410(b) for a
limited period of time after an acquisition or disposition if it
satisfies section 410(b) (without regard to the special rule)
immediately before the acquisition or disposition and there is no
significant change in the plan or in the coverage of the plan other than
the acquisition or disposition. For purposes of section 410(b)(6)© and
this paragraph (f), the terms ``acquisition'' and ``disposition'' refer
to an asset or stock acquisition, merger, or other similar transaction
involving a change in employer of the employees of a trade or business.

(1) If the acquisition is done by an entity that participates in the first plan, unless that plan provides otherwise (which I have never seen but is possible), all of the otherwise eligible employees of that company (including employees of the new division) would be eligible to participate in the first plan automatically. Any amendment to change that result would blow the transition period (ie a significant change in the plan or the coverage of the plan).

(2) Assuming that each plan covers a non-discriminatory group of employees, it can cover separate divisions within a legal entity. This is a common plan design for larger employers.