To eliminate the 6% excess-contribution penalty for 2024, your 2024 tax return needs to include $3,850 of the distribution as being taxable and subject to the 20% additional tax. If you paid medical expenses in 2024 to which you can apply the other $248, that will eliminate the tax and 20% penalty on the $248. To eliminate all of the excess, you can claim no more than $248 as being applied to medical expenses. A consequence of failing to correct the excess timely is double taxation of the excess.
If the HSA custodian will not correct the coding of the distribution, yes, you'll need to enter code 1 in box 3 and nothing in box 2, then provide explanation with your printed and mailed tax return.
