"which reduced his taxable W2 gross"

That means there is no basis; everything went in pre-taxed, and everything comes out taxed as ordinary income.

"Code 2 in this case is for Early Distribution."

That's not really what it means. It means he is under 59 1/2, but some situation or scenario means it is not early and the issuer knows that fact. For instance, this one: "A distribution from a governmental defined benefit plan to a public safety employee after separation from service in or after the year the employee has reached age 50."

"This is a private municipal pension."

So, public and local government.

You might have a State that excludes PSO retirement from taxation, or the first $20k of the year, or something.