Hi NCVA,
To create the distribution group as I mentioned before, it only allows setting up the groups which are including the original domain, or the verified custom domains.
If you want to send emails to a no Office 365 group, such as a @yahoo.com account, a @hotmail.com account, the members of the group are counted individually. Moreover, there is a 500 recipients limitation by design. You can see the related information at this site Message and Recipient Limits.
Thanks,
Maggie Li