You are correct about the Penalty on the $20,000.balance.....I was concentrating too much on the qualified amount.... 

There were a couple of reasons for the $30,000.00 being qualified.  Client withdrew the funds in three different segments.  The first was when he became unemployed, and the same with the second.  The third for $20,000. was taken out after he was rehired. He originally took a good amount of withholding to cover the penalties.  He still has some of the $20,000 in savings and used some for a celebration vacation.  I explained to him that he could put it back into the retirement fund to avoid more tax.  He is getting a small refund this year and said that he would consider putting some or all back over the next couple of years but was hesitant and didn't want to put it back in just to have to pull it back out again.  He is employed in the resort industry and feels a bit insecure about it.

You are correct on the 1099-R... and I was only putting it out there to start some thinking into adding another code to cover disasters in the future.