"For Turbotax, I'm thinking of changing the 1099-SA to have distribution code 2, then adding the balance back as miscellaneous income. When I just change 1099-SA to distribution code 2, it calculates too much refund, which is why I add it back in the misc section."
To paraphrase Miss Piggy, "too much refund? As if such a thing was even possible." 😉
When you change the distribution code to 2, then the distribution is not added back to Other Income...because it already was when the original excess was found by TurboTax. So, NO, you will not add the distribution to Other Income. If you look at your return in Forms mode, you will see that the original excess has already been added back to income - you don't need to double it.
This is the second conversation I am having now with a taxpayer about mistakes made by an HSA custodian; sadly, the best way out is for the taxpayer to correct the 1099-SA to what it should have been, and document the heck out of it. in case anyone ever asks.
P.S., there is no reason not to amend your return through TurboTax - it will make sure that things are correct.
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