Some sexual play is normal in children , however it is the touching of others that draws the line ,you dont want him thinking its okay to behave like that , I think you will find that supervision of them ,awareness, and telling him he cant do that is enough ..good luck
Yes he is far to young and i suggest as a physcologist that you should take him to a physcologist.
I doubt a 2 year old would touch unless by accident when he was asleep, do they share a bed ? I would say that supervision is important and yes it is necessary to tell him he cannot do it, he will go to school and do the same to others . Is he alone with other people or are you his only caregiver apart from school ,maybe children there have been playing games .