To expand on what TomD8 and VolvoGirl said, normally the 401(k) plan will know your age and separation date so that they can code the Form 1099-R with code 2 if you qualify for this exception. TurboTax and the IRS know to treat code 2 as indicating that there is no early-distribution penalty on this distribution. If the plan uses code 1 instead, you can still file Form 5329 Part I and claim on line 2 a code 01 exception to the penalty. As you continue through TurboTax's step-by-step mode TurboTax will offer several options for penalty exceptions but won't offer this particular exception if you have not yet reached age 55. (Despite having sufficient information to determine that you do not qualify for the exception, TurboTax does not flag an error if you make the entry in forms mode.)
It's up to the IRS whether or not to question your use of any particular exception claimed on Form 5329 and might request supporting documentation. If you claim a code 01 exception and you have not yet reached age 55, the IRS is likely to disallow the exception. Similarly, if you claim a code 01 exception but your distribution is from an IRA, the IRS is likely to disallow the exception because this exception does not apply to IRAs.
