I wrote a letter to Stephen Sondheim, asking him about the subject of this post. And today I heard back from him! He wrote that the date in the book is wrong, and it would be corrected for subsequent printings. He said he and James Lapine did meet with Jim Henson about the project in 1989.
In my mind, a meeting of Sondheim and Henson could only occur on Mount Olympus. But I'm very glad to know, as I suspected, that the meeting actually happened.