Do I want to "elect to treat the tax withheld as paid when it was actually withheld" for purposes of figuring the underpayment penalty? This isn't making sense to me.

The IRS expects tax to be paid in the same quarter the corresponding income is earned.  That said, for W-2 income they assume that everything is earned and tax paid in equal amounts each quarter throughout the year, unless you tell them differently.   Perhaps you had very high withholding in the first quarter compared to the rest of the year.  Calculating your underpayment treating tax withheld as paid when actually withheld could reduce or eliminate your underpayment penalty.   For more information see the IRS site:  

Underpayment of Estimated Tax by Individuals Penalty