Were the HSA contributions through your employer? They would be listed as code "W" on your W-2 If so, TurboTax is probably doing it correct.
When you enter your Code "W" on your W-2, TurboTax automatically assumes that you did NOT qualify to contribute to the HSA, so it adds taxes and gives you a penalty.
Later in the interview, when you answer questions about the HSA (such as having a High Deductible Health Plan, and not having Medicare or other insurance), that lets TurboTax know that you DO qualify for the HSA contribution. It then removes the tax and penalty it gave you when you entered Code "W" on your W-2. Therefore your refund goes back up.
When you say all of the medical distributions on the 1099-SA were used for Medical Expenses, it removes the penalty for non-qualified distributions.
Does that make sense?
