You are correct. At this time, Minnesota does not follow federal law in allowing you to spread a CARES Act related distribution over three years.
Minnesota says, "The American Rescue Plan Act was signed into U.S. law on March 11, 2021. We're analyzing how this law may impact Minnesota taxes and watching for possible state law changes."
Does that mean in Minnesota we should pay taxes on100% on the distribution in year #1?
No. Minnesota did not conform to the 2020 Corona-virus related 401 K distribution. The 2020 Corona-virus related 401 withdrawal is fully taxable in Minnesota. You may still spread the distribution on your 2020 Federal income tax return for 3 years beginning tax year 2021.
See, minnesota law change faq 2020, link