Most likely you can get away without upgrading to AFCI just because you're scrunching breakers down. However it's up to the AHJ. Unfortunately, I don't think I've ever seen a tandem/skinny AFCI breaker if it comes to that.

Given one multi wire circuit here you can get away with what you are doing without installing a grounding system at the outbuilding.

Are we talking about one of those spa packs? (GFCI disconnect things). Why bother? You could just put a GFCI breaker in the panel or a GFCI receptacle in the outbuilding.

Ronnatalie, thanks for your input. I don't think they make tandem AFCI breaker either. I'm hoping they consider what I'm doing simple replacement and let it slide otherwise my plan goes out the window.

Your right, the existing wire was (I assume) connected to a hot tub. The spa is gone but all the wiring and the disconnect box stayed. They only reason I'd use it is because it's already here.

A couple potential problems I forgot in my earlier post:
The existing wires are all black with tape to color code the ends. I'm not sure if that is still allowed. And the conduit is just sitting on the ground of the crawl space, not secured to the walls or joists. It's less then a crawl space, more of a belly slide space, but I think they may make me do something there.

It's not legal now nor has it been legal for a very long time to mark #6 black wire white or green to designate ground or neutral conductors. You don't have a legal installation now, nor was it likely legal at the time the hot tub was installed.

Thanks Ronnatalie. That is a great thing to know in advance. I won't mess around with trying to save time/money by using the existing set up and will just run new 12/3 cable through the crawl space.

Please post any other advice you may, otherwise I'll update after the first inspection.