I know the Code does not permit distributions upon termination of a 457 plan. I have two questions relating to this point.

Has the IRS ever commented on this issue?

What happens if distributions are made anyway (is it just that the distributions are taxable and can't be transferred or rolled over into another plan or is there more)?

To the best of my knowledge, the IRS has never commented. And, as you say, it is hard for the IRS to do much if the employer and the employee both agree to the distribution. The real risks would be that (a) an employee who did not agree to receive a distribution right away would be taxable on that distribution anyway, and (B) that employee might assert a contractual right under applicable state or local law to have the distribution (and therefore the tax) deferred. Obviously, the success of any such argument would depend a lot on the facts, and the provisions of applicable state and/or local law.