Q: Are teachers allowed to let students pass out tests after they are graded and in the grade? Or would this violate FERPA

A: You are referring to Owasso Indep. Sch. Dist. No. I-011 v. Falvo, 534 U.S. 426 (2002). I don't read your facts as a violation of FERPA. Here's why. Under the Act, "federal funds are to be withheld from school districts that have `a policy or practice of permitting the release of education records (or personally identifiable information contained therein...) of students without the written consent of their parents.'" Id. at 428-29, 122 S. Ct. at 937 (quoting 20 U.S.C. § 1232g(b)(1)). The Act defines "education records" as "`records, files, documents, and other materials' containing information directly related to a student, which `are maintained by an educational agency or institution or by a person acting for such agency or institution.'" Id. at 429, 122 S. Ct. at 937 (quoting 20 U.S.C. § 1232g(a)(4)(A)).

I don't think that the papers themselves are educational records, a reading supported by the Supreme Court's decision in Owasso. In that case, even though peer-grading results in students finding out each other’s grades, the Court held thatthis practice does not violate FERPA because grades on students’ papers are not “maintained” under the definition of “education records” and, therefore, would not be covered under FERPA at least until the teacher has collected and recorded them in the teacher’s grade book, a decision consistent with the Department’s longstanding position on peer-grading. Among other considerations, the Court expressed doubt that Congress intended to intervene in such a drastic fashion with traditional State functions or that the “federal power would exercise minute control over specific teaching methods and instructional dynamics in classrooms throughout the country.” Source: https://www2.ed.gov/policy/gen/guid/fpco/pdf/ht12-17-08-att.pdf

Finally, there was nothing in the fact pattern you gave that indicated the students passing out found out the grades. The mere handing out of the papers would not be sufficient for a violation of FERPA in any event.