It's complicated, you may want to go to a tax pro.
You should remove the funds from the Coverdell account. The 2014 funds will be a roll over. A roll over to a 529 plan is a qualified (non taxable) distribution. The 2015 & 2016 funds will be a contribution to the 529 (not a rollover). You may want to talk to the 529 plan people about the proper contribution/rollover application forms.
The removal of the 2016 contributions is not subject to penalty, as you have until June 1, 2017 to remove that money. You missed the deadline of June 1, 2016 for removing the 2015 contributions and are subject to a 6% excess contribution penalty on the $3600, which should be reported on form 5329.
Pub 970 indicates that the beneficiary is responsible for excess contributions, so a beneficiary on behalf of whom excess Coverdell contributions were made (and not removed by a return of contribution by June 1 of year following the year for which the contribution is made) must file Form 5329. Form 5329 can be filed stand-alone if the beneficiary otherwise does not file a tax return with which the Form 5329 would be filed.
The excess contribution is subject to the 6% excess contribution penalty each year the excess remains in the account. If not returned before June 1 of the year following the year for which the contribution is made. The excess must be distributed to the beneficiary without any adjustment for earnings. This is taxable to the beneficiary as a regular distribution (a proportional amount of basis and earnings, with the earnings subject to tax if not used for qualified education expense and to a 10% penalty unless an exception applies).
You have made excess contributions of $1,800 on behalf of each of the two beneficiaries for 2015 and $1,200 excess contributions on behalf of each for 2016. For the 2015 excess contributions, you must prepare Form 5329 for each beneficiary and pay the 6%, $108 for each and, before the end of 2016, make a distribution of $1,800 from each account. The excess 2016 contributions should be removed by a return of contribution (with earnings, which will be taxable but not subject to the 10% early distribution penalty).
