"Do I have a misunderstanding of how HSA works and TurboTax is correct?"
Yes, you do not understand how HSAs work, and TurboTax is correct. HSA rules are remarkably arcane and obscure for such a simple thing, and I find that HR people and even HSA custodians don't always understand them.
The definition of "excess HSA contributions" is simply that you contributed more to your HSA than was allowed by your HDHP coverage. The amount that was distributed during the year has no bearing on this, nor does it matter how much you have in the HSA at any given point.
TurboTax calculates your annual HSA contribution limit based on whether you had Family or Self-only HDHP coverage, how many months you had coverage, whether you had coverage on December 1, 2019, whether or not you had conflicting coverage (like Medicare or a spouse's FSA), and whether or not you were 55+.
If you contributed more than that amount for 2020, then you had excess contributions.
To repeat, excess contributions are not affected in any way by distributions.
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