Sorry for the confusion everybody!
Here's how it works:
For every active hosting plan you have for a year, you get one free domain registration for that year.
You no longer really specify which domain registration (or transfer) is your "free" one. Instead, our system will just check if you have any unused whenever you register (or transfer) a domain, and if so it'll give you $9.95 off.
What that text on the signup was trying to convey is, even if you sign up and pre-pay for two years of hosting, your domain will only be registered for one year for free. When it is about to expire though, you can renew it, and since you'll have a free domain registration still available on your account, it'll be free to renew it then!
You can also set your domain registrations to be automatically renewed, and when the time comes if you have a free one because of a hosting plan, that renewal will be free.
Make some sense I hope?