As explained somewhere above on this page it must be 'in' because 'nel' means 'in the'. The only reason Duo is giving the 'on the' hint is because Italians say "in the plate" (nel piatto) which is "on the plate" in English. "La mosca è nel burro."You can assume that the fly is stuck in the butter.
One time I visited Italy and, despite having spent months on Duolingo, found myself unable or unwilling to say anything at all in Italian. So I picked up a tiny greenish beetle that was at that very moment crawling on the floor of the cafe. I placed it harmlessly in the butter. Score.
But the hover doesn't say that they are OK in this sentence.
The hover hints are global and the same hints will appear wherever a given word is used.
The system tries to sort the hints so that the topmost hint will apply to the current sentence but even that sometimes fails (if a given word appears twice in a sentence with different translations, for example).
nel piatto is "on the plate" (Italians say literally "in the plate" but in English this is "on the plate" -- we think of them as flat things that food is on, Italians as slightly bowl-shaped things that food is in).
But this sentence is not about plates.
Whether you should use 'nel' or 'nello' depends on the article: nel = in + il, and nello = in + lo. You can find more explanation in the Tips and notes of Basics 2. Indeed, sometimes 'nel'/'nello' is translated with 'in' and then again with 'on'. The basic meaning is "in". Italian plates are less flat than English plates and therefore "nel piatto" is translated as "on the plate" while it literally says "in the plate".