Yes, Schwab shouldn't have processed the request like that since it was after the extended due date of the 2020 return.
Applying the excess contribution as a contribution in the following year is a process done on the tax return and not with your financial institution. On your 2021 amended tax return, you will report Form 2022 1099-R with codes P and J. You also will follow these steps to apply the 2020 excess to 2021 to avoid paying the 6% penalty for 2021 and indicate you remove the excess contribution:
- Click on "Search" on the top right and type “IRA contributions”
- Click on “Jump to IRA contributions"
- Select “Roth IRA”
- Enter your 2021 Roth contributions
- On the "Do you have any Excess Roth Contributions" answer "Yes"
- On the "Enter Excess Contributions" screen enter the total excess contribution from 2020 ($1,500).
- On the "How Much Excess to 2021?" screen enter $1,500 to apply to 2021.
- On the Penalty screen enter that you removed the excess contribution amount ($1,500) by the due date
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