Even though the HFD is not taxable, the amount is required to be reported on Form 1040 line 4a but be excluded from line 4b with the HFD notation. The method that I described is the only way to do it with TurboTax without resorting to overrides which would prevent you from e-filing. This method simply works around TurboTax's limitation while creating and filing a tax return that is identical in every way to one that would be created and filed if TurboTax supported identifying a code J or code T distribution as an HFD.
When using code 1 (under age 59½) or code 7 (age 59½ or over) and marking the IRA/SEP/SIMPLE box, make sure to indicate that the amount was paid to an HSA.
