How does this handle distributed accounts?

Chris -- technically, you can change your username if you are using distributed auth.

Try it here on Drupal.org -- you can go and edit your membername to be whatever you like, but your login will still be your remote username@server.

Might be interesting to file a feature request for distributed auth to re-use your remote username locally if it's not taken, and/or prompt you on first login for a local username.

(doesn't answer your question for this, but FYI)