I know that stocks are not an allowable investment in a 403(B)(7) plan. What are the ramifications if someone buys them in the plan? What about if it's an ERISA plan vs. a non-ERISA plan?

The correct answer should be that the employee has purchased stock with after-tax dollars, and the employer is responsible for failure to properly withhold and report.

I've assumed that he has used new money for the purchase. If he used old money, he needed to have taken a distribution to make the purchase and that could create more serious problems if he is not eligible for a distribution.

Check the IRS guidelines to see if they stated anything about improper investments.

In part X of "Tax Consequences of 403(B) Failures", under "Plan Failures", it says in part in ©, "In the absence of appropriate funding vehicles, the plan from its inception is not a 403(B) plan." However, I am told that the IRS has not yet disqualified an entire 403(B) plan - don't know for sure if that's true.

Because it is an eligibility failure, it cannot be corrected under APRSC - but, could be corrected through voluntary formal submission under TVC.