This is a correctable error. This being a failed rollover, it constitutes a distribution paid to her and an entirely separate contribution by you to your IRA. The amount is essentially a gift from her to you unless you give the money back to her.
Because the 60-day deadline for an indirect rollover has not yet passed, she can open an IRA and make a rollover deposit to the IRA of the gross amount of the distribution from the 401(k), thus continuing to defer taxes and avoiding any early-distribution penalty.
You could either keep the deposit into the IRA and report it as your own IRA contribution or you could obtain an explicit return of contribution. Either way, unless she intends this to be a gift to you, you need to reimburse her for these funds. The amount distributed as a return of contribution will be adjusted for any investment gain or loss, so you might end up either keeping some of this return of contribution or having to supplement it with other funds to give her back an amount equal to the amount erroneously deposited into your IRA.
You'll want to make sure that your IRA custodian reports on Form 5498 the deposit into your IRA as being a regular contribution, not a rollover contribution, otherwise there's a good chance that IRS will flag the discrepancy between the amount reported as distributions from your retirement accounts and the amounts reported as rollovers to your IRA.
