@dmertz is correct (as is his habit) that you do withdraw the earnings in 2021 and report them on your 2021 tax return.
"Normally" (as normal as anything is in the tax code), the taxpayer does not calculate the earnings, but when the taxpayer requests that the excess contributions be withdrawn, the HSA custodian calculates the earnings for you (it is easier for them), and handles the 1099-SA for 2021.
I have a slight concern that the HSA custodian will come up with a different number than $118 which becomes the amount to withdraw; however, since you were willing to read the Treasury regs, I can hope that you arrived at the right number. Perhaps the HSA custodian will just process your excess contribution request and calculate the earnings and work with whatever they come up with.
Your understanding is correct, and I am glad that you will be able to put this behind you and not drag the excess into future years.
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