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If they amend to retroactively adopt the 4% safe harbor nonelective, then there is no ADP test, and therefore no refund and thus no late refund penalty.

No. Think of the loan as a phantom account. You keep accruing interest on the phantom account, so if, a year after the deemed distribution, she has accrued interest of $2000, her total loan balance is $18,000, which is an effective offset against the $50,000 maximum. That's the purpose of accruing interest. When she takes an actual distribution, she gets her entire non-loan balance, and the loan, whatever the amount at the time, is "distributed" but there is no reporting since it has already been reported (on a 1099-R).