What to do (years later) with otherwise good student who has accidentally plagiarised part of PhD thesis?
Did any of the plagiarized material make it into journal papers, or was it all literature review that was never published outside of the thesis?

If some of it made it into papers, then it's important to contact the journals and publish corrections.  This is more straightforward and predictable than dealing with the thesis itself.  If the plagiarism is confined to background material, then I don't think retracting the papers would be necessary.  Instead, I expect it would be possible to publish a correction that indicates the plagiarized portions and provides citations.  This would be embarrassing and would hurt her reputation a little, but it would solve the problem as far as the papers were concerned.  It would also strengthen the student's case for dealing with the thesis if she can say she voluntarily corrected the publications and did not need to retract any of them.

If none of the plagiarized material was published elsewhere, then it's trickier.  Once all the original results are published in research papers, I doubt anyone will read the thesis and discover the plagiarism.  Even if they do, they might take pity on the student and ignore the plagiarism.  (I once ignored some mild plagiarism of my writing in the background sections of a thesis at another university.  The student had already graduated, and I found no evidence of plagiarism in any of his research papers.  If I knew for sure he could just file a correction to the thesis, then that would make sense, but I wouldn't want to potentially destroy his career over this mistake.)  So she might well get away with it if she doesn't say anything.  Still, I'd advise her to officially confess to the university.  Turning herself in is likely to lead to a much better outcome than being caught by someone else.  Plus it's the right thing to do, and it will save her from years of worrying about getting caught.


  We both risk losing our jobs, and she is at risk of losing her degree as well (which, by the way, was a very strong thesis with a good number of top journal publications). 


Unless your university is extraordinarily strict, I don't think your job is in jeopardy.  On the other hand, the student's degree or job might be, depending on how the university handles the situation.  Based on your description, I think it would be unfair for her career to be ruined, but I can't predict what will actually happen.  I hope your administration's sense of fairness is the same as mine, in which case a correction will suffice.

The hardest situation will be if she decides to remain silent.  In that case you probably have an obligation to turn her in, and it would look terrible if anyone found out that you knew but didn't say anything.  On the other hand, turning her in would be a tough decision.  Much better for her to turn herself in voluntarily.