If the funds were all native 457(b) funds, it's really odd that the payer would use code 1. It might be worth asking the plan administrator about it.
As indicated in the instructions for Form 5329 line 2, you can claim an Other reason exception to the early distribution penalty for "Distributions from a section 457 plan, which aren’t from a rollover from a qualified retirement plan." You can do this in TurboTax and e-file. Either click the Continue button on the Your 1099-R Entries page or go to Other Tax Situations -> Additional Tax Payments -> Extra tax on early retirement withdrawals, indicate that it's a Qualified retirement plan, then make the entry in the Other box on the page titled "These Situations May Lower your Tax Bill."
