Instead, Capt. James Clement will face administrative punishment in the 2011 incident, Marine Corps Times reported.
Clement had faced the prospect of a court-martial in November on charges of dereliction of duty and conduct unbecoming of an officer. An administrative board of inquiry will instead consider lesser infractions, including misconduct and substandard performance of duty.
Clement was the executive officer of the Marine company involved in the incident, which raised controversy in Washington because of concerns it would become a propaganda tool for the Taliban. Clement was not in the video.
His civilian lawyer told the Marine Corps Times he was disappointed the Pentagon planned to punish his client even though the criminal charges were dropped.
"The charges never should have been brought in the first place, and we clearly demonstrated that," said lawyer John Dowd. "We will demonstrate that again in the Board of Inquiry."