I'm not seeing this in my test group. With both checked, I get a plain text message with a plain text footer...no html to be found.
My own test confirms your results.
I could swear I had tested this combination in the past, but maybe I confused myself. Or maybe it has changed and I didn't notice or don't remember.
Given that result I agree that making it a set of radio buttons would be clearer. I'll side with Andy in favor of graying out the Normalize checkbox if Plain Text is selected, rather than hiding it.