Part of the penalty for failing to correct the excess contribution timely is double taxation of the excess amount. After the due date, including extensions, of the tax return for the year of the excess contribution, the excess can only be corrected by obtaining a taxable distribution from your HSA. You can see this on line 44 of Form 5329 which comes from line 16 of Form 8889.
Option 3 is only a possibility if you are eligible to make an HSA contribution for the later year. For those who have made excess HSA contributions, a large number of people did so without considering that recently acquired Medicare coverage made them ineligible to contribute and will never again be eligible to contribute, so the option to apply an excess as a future year contribution doesn't come up. In your case, you said that you already requested a distribution of the excess, so I didn't mention Option 3.
Regarding Option 2, that eliminates the penalty on the excess but does not seem to eliminate the excess itself.
