Q. can I still avoid the penalty if he is still on active duty and can not use this benefit yet?
A. No. The penalty is waived only if there were actual educational expenses and those expenses were already covered by some other tax benefit (scholarships, Veterans benefits, tuition credits or deduction).
If you are merely cashing out in anticipation of not needing the money, for education, in the future, that doesn't count for a penalty waiver.
