I managed to workaround the issue with the following change to
/usr/lib/linux-boot-prober/mounted/40grub2:


diff --git a/40grub2 b/41grub2-linux16
index 885614e..8b3e179 100755
--- a/40grub2
+++ b/41grub2-linux16
@@ -64,7 +64,7 @@ parse_grub_menu () {
                                        ignore_item=1
                                fi
                        ;;
-                       linux)
+                       linux|linux16)
                                # Hack alert: sed off any (hdn,n) but
                                # assume the kernel is on the same
                                # partition.
@@ -77,7 +77,7 @@ parse_grub_menu () {
                                        kernel="/boot$kernel"
                                fi
                        ;;
-                       initrd)
+                       initrd|initrd16)
                                initrd="$(echo "$2" | sed 's/(.*)//')"
                                # Initrd same.
                                if [ "$partition" != "$bootpart" ]; then

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