Separation from Service

I'm 59 years old and was placed on part-time variable status with my employer. 

I was allowed to collect unemployment and look for work elsewhere without conflict of interest.

I took out money from my 401K  and box 7 displays code 1 on my 1099R 

I am now 59 1/2 and filing my return.  

Does my situation qualify as Separation from Service during or after age 55?

Can I avoid the 10% tax penalty?