The subject behavior will occur if the terminal server user is only a member of the local Guest security group.

NOTE: The user receives no errors and the session behaves normally.

You can safely ignore this error:

Event Type: Error
Event Source: Winlogon
Event Category: None
Event ID: 1218
User: N/A
Computer:
Description: Failed to load Terminal Server Profile path. Note that the profile path must be less than 256 characters in length.
User Name: <User Name>
Domain: <Domain Name>

If you wish to prevent this error, remove the user from the Guest group and add them to a group with greater rights.