He does not need to report his 401K withdrawal to the unemployment office even if he withdraws the full amount.
Unemployment is based on the income made when working and not on savings or retirement savings.

Unemployment is more based on how long he has been working, the reason for the separation, any gift monies given to him by the employer(vacation pay or separation package), and how long he was employed based on the base year. The base year is a definition which will vary from state to state.

He does need to report to the IRS. In addition to the ten percent tax penalty, he will also have to report it as retirement income. This is important as a large withdrawal amount that is not taxed can raise a red flag for the IRS which can lead to an audit.

The best rule of thumb is to simply disclose everything. This way it doesn't come back to haunt you at a later date.

A 401K disbursement should have no effect on whether he qualifies for unemployment or not. And, if the clerk he is speaking to seems incompetent or unseasoned, perhaps wait until he is with a clerk who seems knowledgeable. You wouldn't want to not mention it in hopes that it won't be an issue...the truth is, most of the time when people are taking distributions they don't really know what the plan is that they are withdrawing from. If you speak directly to the unemployment office, they can help guide you in the proper way to address it.

Even if it did qualify as income for some reason, it would only effect the week that he received the disbursement....not ongoing benefits.