My husband was forced to take an early distribution from his 401k due to the balance dropping. Are we penalized?

If you take money out of a retirement account before age 59 1/2 you are subject to the 10% early withdrawal penalty.   Fluctuations in the market do not waive that penalty.   Enter your 1099R into the software.

To enter your retirement income, Go to  Federal> Wages and Income>Retirement Plans and Social Security>IRA  401 k) Pension Plan Withdrawals to enter your 1099R.

Any money you take out before age 59-1/2 (or age 55 if you separate from service from that employer) is subject to income tax plus a 10% penalty for early withdrawal.  Wanting to reinvest in something different is not an exception to the penalty.