There's no risk with the IRS, for doing so. The IRS only matches total 1099-S dollars
I would ask the 529 for separate 1099-Qs. If for no other reason to let them know that tax software can't handle a combined 1099-Q and they've done you disservice by doing so.
A 529 plan can only have one beneficiary. If you use some of the money for your 2nd child, that is a non qualified distribution and subject to tax and penalty.
If you want to use the money for the other child, you first have to open a new 529 account and then rollover some of the money. The 529 plan administrator can show you how to do that. Then, take a distribution.
Yes, it's a bunch of hoops to jump thru, but that's the rules.