Yes, that is fine for this year. If you withdrew the excess contribution from 2020 after January 1, 2021, you should have received a 1099-SA with a Code 2 that you need to report this year. Any earnings in Box 2 would be added to your taxable income. Make sure when you withdraw the $125 you tell the HSA provider it is for an excess contribution.
If your 2020 return is showing an over-contribution and you have not already amended it for the excess contributions withdrawn prior to the filing deadline of May 17, 2021, then you can amend your 2020 return to remove the 6% penalty on excess contribution of $2,625.
