When added to a tag set alongside their (canonical) fandom, non-canonical characters and relationships appear to be nested inside the canonical fandom, not in the "Unassociated Characters & Relationships" section. But when the tag set is used in a challenge, the non-canonical characters and relationships sometimes behave as though they're not associated with the fandom.
As a tag wrangler, create a brand new non-canonical character, and add a (pre-existing) canonical fandom to it. (We need to use a brand new character to avoid AO3-5712.)
Create a tag set with the canonical fandom and the non-canonical character.
Note that the fandom and character appear to be associated in the tag set, thanks to the wrangling. This is because the tag set considers them to be associated as long as there's a CommonTagging linking them. So there's no need to add a TagSetAssociation to move the character out of the "Unassociated Characters & Relationships" section.
Create a challenge that uses that tag set. Make sure that "Fandom only?" is selected under "Character Settings."
Try to sign up for your challenge with the fandom/non-canonical character combo.
Since they appear to be associated in the tag set, you'd expect to be able to sign up. Instead, you'll get an error saying that they aren't associated. This is because Prompt#restricted_tags ignores CommonTaggings if the child tag is non-canonical, so the non-canonical tag counts as unassociated in this context.
Note: While both this issue and result in items being missing from the autocomplete, the distinction is that the problem tags from can still be entered manually if you just ignore the autocomplete. The problem tags from this issue cannot be entered manually.