Agreed about not bothering with a Roth Conversion, if you can't get it invested or even set up in the USA when you are non-resident. I assume the OP was looking for ways to get the money out of this foreign account without the penalty, and came across the description of Roth Ladders.
Who "reimburses" the penalty?
When I filed my Canadian tax return, I was now able to claim both the US withholding tax AND the 10% IRA early withdrawal penalty as "Foreign Taxes" paid. On the Canadian return, the full IRA disbursement was considered income (just like in the USA), so I needed to pay Canadian tax on that, but then the Foreign Taxes paid are subtracted from the total that I owe to Canada. Because Canada does not charge a 10% penalty, I essentially get that back, and it goes as a refund against any other Canadian income I have.
Further, I was able to do this as a "Rollover" to my Canadian account (with some limits, and this is country specific), so I also received a reduced canadian tax for the amount added "rolled over" into the retirement fund -- but I had to ensure that I was paying a LOT of other taxes that year, to absorb all the refunds / credits.
401k Grandfathered account.
I don't think "grandfathered" is the correct term. When I left the USA, (in the weeks prior) I converted my 401k to a regular IRA (because the tax treaty rules mention IRAs specifically but not 401k's so there are fewer questions about rolling over from the IRA).
My IRA / 401k was in existence due to my US employment. When I left the USA, they do not require you to close out the account.
BUT -- Wells Fargo later put a "freeze" on my account (around 2011 when some SEC filing / reporting rules changes), and I was no longer able to buy or sell my positions, except as a "Sell everything and wire me my money" order to close out the account. Most US banks no longer allow non-resident aliens to buy or sell investments. When I researched it, there were at least two (one large, one smaller) brokerages that did so, but the vast majority do not, and those two may have been specific for Canadian residents, not UK.
I would not call a "Frozen" account a "Grandfathered" account. It is still a valid/ active 401k / IRA to the US government, no different from US residents / citizens, so technically not "grandfathered" or treated any differently by the US government from any other IRA account rules out there. The only catch is that you need a brokerage that will allow non-resident aliens to trade, or it is "frozen" or held as cash only. (Non-residents can hold bank accounts / savings)