"When I started my 2020 taxes and transferred my info from 2019 the software told me I had $204 tax due before I even entered any income."
I do not know where this $204 came from, but I don't know that it had anything to do with your HSA.
If you made excess contributions in 2019, TurboTax would had told you, and asked you if you wanted to withdraw it. If you did not withdraw it all by July 15, 2020, then TurboTax would have added form 5329 to your return, which would calculate a 6% excise tax on the excess contributions that were not withdrawn in time (see Section VII).
If you didn't have a 5329 on your 2019 return, then I have to assume that you entered 2019 correctly.
"On the 2020 Form 8889 transferred for my wife it shows on Part III line 18 smart worksheet/section C/#1"Total maximum allowable contribution for 2019" is $4,958. Part III line 18 smart worksheet/section C/#2 "Amount allocated to spouse in 2019" is $3,500. Part III line 18 smart worksheet/section c/#3 "Net maximum allowable contribution for 2019" is $1,548. Then Part III line 18 "Last month rule" shows $2,042. Part III line 20 "Total income" shows $2,042 and Part III line 21 "Additional tax" shows $204. "
All of the entries are related to the question at the end of the HSA interview: "What Kind of High Deductible Health Plan did [name] have on December 1, 2019?" I assume that the name here was your spouse's.
I also assume that your spouse does not have an HSA.
The problem here is that this question does not apply to most taxpayers (it should say so but it doesn't).
If your spouse did not have an HSA in 2019 or did have an HSA but did not contribute to it, then your spouse should answer NONE to this question.
These questions and answers are all a result of your spouse answering Family or Self when your spouse should have answered NONE. TurboTax thought that your spouse had used the last-month rule in 2019 but did not maintain HDHP coverage in 2020, which would result in penalties.
Don't be worried if this doesn't make sense - just go back to this questions and if your spouse either did not have an HSA in 2019 or did but did not contribute to it, then answer NONE.
P.S.
"I spoke to my employer and they confirmed that I DID NOT make excess contributions to my HSA."
Your employer does not have enough information to know if you made excess contributions or not. Neither does your HSA custodian.
Only your tax professional and/or tax software - which can see your entire tax situation - can know. I understand the desire to ask your employer, but, in fact, they cannot know. After all, your employer may not be fully aware of your and your spouse's insurance situation, and your employer would not be aware of any HSA contributions that you made directly to the HSA custodian.
If after you make the change to NONE for the HDHP question above, you have any more issues, then please come back and ask.
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