Code 2 was incorrect, this could only be used if the excess was returned within the original deadline (April 15, 2023). This should be code 1 (normal distribution).
To remove the excess contribution, this must be reported as a regular withdrawal that was not used for medical expenses. That will subject it to income tax plus a 20% penalty, but it will remove the ongoing excess issue.
As to why you have to pay tax again? Because that's the rule. All withdrawals that are not used for medical expenses are subject to income tax plus a penalty. The fact that a withdrawal not used for income tax is the only way to clear an excess when you miss the intended deadline (April 15 of the next year) is unfortunate, but that's how the law is written.
The other solution would be to leave the excess in the account and keep paying 6% (instead of paying 22% plus 10%) until you re-enroll in an HDHP and are eligible to make new contributions again, or you spend the account down to zero.
