No EC261 compensation is due as they elected to receive a refund. They didn’t actually travel.
No!
EC261/2004 fully applies.
Norwegian owes you EC261/2004 compensation of EUR 600 per passenger due to the cancellation.
Pax cannot fly on a cancelled flight - naturally.
If Norwegian refuses rebooking onto another carrier, Norwegian has to refund that extra ticket (article 8).
This obligation is only waived, in case the pax elect to go for a full refund of the Norwegian ticket.