Rather than this being a 10% early-distribution penalty, perhaps the distribution is not subject any income tax and therefore not subject to any early-distribution penalty, but is instead causing a reduction in a Retirement Savings Contributions Credit equal to 10% of the amount distributed. If this is the case, this distribution will not be included on Form 1040 line 4b or 5b, Schedule 2 line 6 will not show any penalty with regard to this distribution and you'll see that a credit that is present on Schedule 3 line 4 when the 1099-R is deleted is reduced by 10% of the gross amount distributed when the 1099-R form is present. This is the only scenario I can think of where changing from code 2 to code 1 would not change your tax liability.
