"Why is it that I cannot cure that 2019 excess contribution by moving some of my HSA balance to my 2021 HSA limit? Also would doing this avoid the 20% penalty?"
I admit that I was focused on curing the excess. It is not clear that the IRS considers an ineligible contribution to be exactly the same as an excess contribution, but lacking any directive, TurboTax treats them the same way.
So, given this, an option is to roll the "excess" over to 2020 and pay the 6% penalty. The effect of the rollover is to reduce the 2020 HSA contribution limit by the amount of the rollover. So, in essence, your 2020 HSA contribution was reduced by $3,500, leaving you with what, $50? ($3,550-$3,500).
Of course, this means that you made excess contributions for 2020. Now, you might think that you could withdraw the excess identified by April 15, 2021, and all would be OK, but TurboTax remembers that the original excess was never properly handled, so it won't let you withdraw it.
So, the next thing to do would be to roll over the 2020 excess (the $3,500) to 2021. If you reduce your HSA contributions so that you can count the $3,500 as under the limit in 2021, then you can use up the excess, having paid 6% twice (2019 to 2020 and 2020 to 2021).
This means, however, that you in essence shouldn't make any contributions this year, but just let the original $3,500 excess contribution from 2019 be used up this year.
Does this work for you?
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