"We did however had out of pocket prescription costs in 2019. Can that offset the distribution?"
Yes. Just be sure to document the out-of-pocket payments and the distribution and stick it in your tax file so that you can associate them with the distribution, in case the IRS ever asks.
"However she had this HSA only for a month and we never used it."
Unfortunately, the requirement for reporting the HSA's activities on form 8889 is if there are either contributions or distributions, so the fact that she did not use it doesn't matter.
"My personal contribution for my 2019 HSA (that includes family) did not reach the $7000"
Yes, I think that her contributions were added to your contributions and still stayed under the $7,000, which explains why TurboTax did not report excess contributions.
In the future, please do not take out excess contributions unless TurboTax tells you to. And don't ever take out the earnings on excess contributions - you will be sent a 1099-SA with a distribution code of 2; entering this into TurboTax will take care of that.
"Yes that is what we said and form we filed."
Ha! It serves me right for asking a two-part question - now I don't know if you asked for a withdrawal of excess contributions or just closed the account (see above).
I am going to assume that you filed the request to withdraw excess contributions. If we did nothing, then your paperwork and the HSA custodians paperwork won't match.
So let's do this: contact your HSA custodian and tell them that you had a "mistaken distribution" - the $330. They don't have to honor this so be nice and grovel if you have to. Explain that the problem was that you thought the amount would be an excess contribution but when you did your return, it turns out it wasn't.
They will maybe ask you to sign another form (perhaps online) as well as send them a check for $330 (you'll have to eat that $20 fee for closing).
If they will do the mistaken distribution process, then your paperwork is now clean. They will send you a corrected 1099-SA (although the fact that it will have a zero in box 1 may confuse TurboTax some - well, that a tax year 2020 problem). You no longer have to explain why you took this money out. There will no longer be any income tax or 20% penalty.
Oh, and the HSA custodian will have to reopen her account and put the money in it (you see, they may not want to do this). If they won't do this, then get ready to document what you spent the $330 on - remember that you can apply it to any qualified medical expenses incurred AFTER the creation of your first HSA.
Are we now clear on what to do?
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