I experience the exact same issue, but on PS5 version with local bedrock dedicated server. The split screen player will attempt to load and then the game will revert back to single player, with no messages. On the bedrock server, there is no logs of the second player ever joining the world.
I would assume that with cheats enabled, changing difficulty should not toggle the keepInventory switch. The feature should have only been applicable to those with cheats disabled. Coupling difficulty with keepInventory makes the switch not persistent, and goes against the user expectation for the cheatÂ
Issue still persists for me on 1.21.62