Well, as noted, they have 60 days to return funds to the 401(k), which, if they are within that time frame, is far far smarter than putting the money in the spouse's IRA. The IRA is not a bad solution if it is after 60 days, but understand that you have to contribute ~$5,000 to save ~$1,000-$1,500 on taxes, depending on tax bracket and state taxes, and that money can't be touched until retirement.
(As a side note, I'm a bit surprised that the employer allowed a "hardship" withdrawal for the purchase of a new home. Hardship withdrawals are supposed to be tightly restricted.)
(For anyone else reading this in the future, taking a loan from the 401(k) might have been wiser. It doesn't show up on a credit report, and it's not taxable unless you default on the payments.)
