Yep, you got it. The trick happens entirely during that fan-out of cards that Penn and Teller are inserting into. The trick is that Kostya's bottom hand is not a passive receptacle but is actively reaching out underneath the deck to grab any face-down cards and pull them onto the bottom, but he's practiced it so well that it doesn't look unnatural or jerky. The "into" hand is holding in order:

    1. a few face-down cards on top to make it look like it's still mixed,
    2. all the face-up cards plus Penn's card, which went in face-down,
    3. all the face-down cards plus Teller's card, which went in face-up.

At 4:04 Kostya does a simple move which Penn and Teller are totally allowed to see which reorients these; indeed, Penn's bellow at 4:06 is apparently because he was 100% convinced that this was going to be a "blink and you'll miss it" trick: maybe swapping out the deck, maybe the cards are not perfect rectangles and he can separate them at will, maybe a dozen other ways he knows to get the same illusion -- but instead he just saw the guy turn half of the cards over, meaning that they were already split into face-up and face-down: and he had totally missed it because the cards seemed to move so naturally and the hand underneath was 100% totally hidden from him.