"What should the distribution code be on the 1099R?"
Enter what is on that 1099-R. You don't create that code. You reference it.
"And where do I put it in Proseries so that there no 10% penalty"
"My Clients dist code is 1 should she get a corrected 1099R to reflect this?"
No. There's nothing wrong with it.
"Level Up" is a gaming function, not a real life function.