Do you penalize test knitters who don’t finish?

No.

I know my test knitters are volunteering their time, and that sometimes unexpected things come up which prevent them from finishing by the deadline. As long as they participated in the test knit and provided me with some feedback they still receive the finalized copy of the pattern and a coupon code to exchange for a pattern of their choice.

I prefer to be notified in advance if a test knitter is unable to finish, so I know not to wait for their feedback before sending the pattern back to the tech editor for a final review.