When you enable the auto-populate option for holiday time the system books the time off for that holiday and approves it. Hence, when there is a  time off type user defined field which is mandatory the system would not be able to select a value for the user defined field and hence would not be able to book the timeoff or approve it. The result is that the holiday time will not auto-populate.

Disable the Required setting for the time off type user defined field and that should resolve the issue. Refer to the Related Items section below in this knowledge base to know more about how to the user defined field as a mandatory selection. Make sure to uncheck Required option as shown in the image below,