You haven't said why the penalty won't apply, so it's impossible to say for sure.  But most likely it will be code 1 on the 1099-R and you need to enter the reason why the penalty does not apply on the 5329.

"How is this reported at tax time?"

By the plan manager or the account manager.

"1099-R and if so what is the code in box 7?"

See the codes here:

https://twonline-19.taxwise.com/Help/WebHelp/Content/IRS%20Codes/English/Miscellaneous_Codes/1099R_C...

See the tax topic here:

https://www.irs.gov/taxtopics/tc558

We don't know if this person still works there or not, has any other funds that were rolled into that plan or not.

"Do I have to make adjustments on form 5329?"

"In general, an eligible state or local government section 457 deferred compensation plan isn't a qualified retirement plan and any distribution from such plan isn't subject to the additional 10% tax on early distributions. However, any distribution attributable to amounts the section 457 plan received in a direct transfer or rollover from one of the qualified retirement plans listed above would be subject to the additional 10% tax."

Don't forget that all distributions from a 457 is taxable income, but like everyone said no 10% penalty, also you have to start taking distributions at 72.