In order to answer the question of reduced writing demands, we would need to know why fine motor speed is so dramatically different from his verbal cognition. An occupational therapy evaluation would have provided some of that data, as it might suggest some hypotheses regarding weaknesses in, say, fine motor control, or visual organization--or even lead to further evaluation by a developmental optometrist (as polarbear was alluding, with the discussion of visual tracking and convergence challenges). I prefer to pair reduced demands with remediation for the related skill deficit, especially this young. It is indeed possible that, at some point, it may become apparent that handwriting will not be the avenue for written expression (that is, that his handwriting will not "catch up"), and the focus should switch to assistive technology (aka typing or speech-to-text). That moment probably has not yet come. But it doesn't mean he needs to have his access to language expression or math instruction limited by his handwriting delays. It is actually quite within the range of the average kindergarten teacher's skill set and practices to scribe stories and captions for students, as even students with average or above handwriting often have a hard time generating meaningful language while handwriting.
It's not so much a question of reducing handwriting work, as of limiting handwriting exercises to a certain number of minutes of pure handwriting practice (ideally under the guidance of an OT), while accommodating other written tasks with a scribe or oral assessment.
Your description of "lost" skills suggests to me that there may be some automaticity weaknesses, which is one of the core cognitive skill deficits underlying both dyslexia and dysgraphia (as well as many dyspraxias). He's young yet to truly assess for automaticity and fluency (most children his age don't have fluency for the kinds of things that might turn up on tests), but I would keep an eye on that. It sounds a bit like the theorized lack of automaticity leads to having to essentially learn skills anew, or solve puzzles from scratch each time, rather than being able to holdover some internalized steps from past exposures. It looks like he's "lost" skills because the usual assumption is that if someone demonstrates a skill, they've actually learned it to mastery, and "own" the skill for the future. That might not be the case for him; he may be repeatedly learning the skill as if for the first time, rather than building on the last time. Meaningful language, on the other hand, isn't as much about mastering a skill as it is about understanding--which he does rather well. Building freeform Legos is less about memorizing a complex series of motions than it is about problem solving--which he also does rather well. Learning a spelling word, however, is often more about memorizing a rote sequence of letters--which he's quite a bit weaker at. Similarly the kind of early reading that most kindergarten's teach/expect. If you tried a systematic, rules-based approach like Orton-Gillingham (the gold standard for remediating dyslexia), he might catch on to both reading and spelling more readily.
