You are correct that the Rollover is not taxable compensation for Pennsylvania. (It would also not be taxable to you because you are eligible for retirement payments). TurboTax uses the Box 16 designation to assign the income to Pennsylvania.
Payments received from an eligible Pennsylvania retirement plan which are rolled over into another plan, where the transferred amounts are not includable in income for federal income tax purposes are not included in the plan participant’s taxable compensation. See Federal Form 1099-R Reconciliation for Pennsylvania Personal Income Tax
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