My daughter quit talking for almost a week when she was 2, but she was terribly sick with the flu and I think she was in too much pain to do anything including talking. She would point and grunt if she needed something. After she recovered, she started talking again. I would take him to his doctor to rule out any physical discomfort. Worth a try.
The behavior is deserving of concern, but not excessive concern at this point. It deserves concern because it is not what you would expect from a child his age. Has he had any sudden changes in his environment of late? Has anything occurred that appeared to trouble him in some way? The behavior does not deserve punishment, so I would discontinue use of time out. However, your approach of encouraging, even insisting, that he communicate his needs via words is fine. Even if he becomes upset with your approach, stick with it. Otherwise you will essentially be reinforcing the behavior, and that's probably not a sensible thing.