"We received a 1099-SA for 2024 showing the $1,937 distribution in Box 1, the $4 earnings in Box 2, and Distribution Code 2 (excess contributions) in Box 3. All seemed right."
That's the problem. Correcting the 2021 excess contribution after the due date of your 2021 tax return can only be done by making an ordinary code-1 taxable HSA distribution. A code-2 distribution is not permitted and the HSA custodian erred in allowing such a request to be processed. (Even if this was permitted to be a return of contribution before the due date of the tax return, the amount in box 1 should be the sum of the amount of excess that you requested be returned ($1,937) and the attributable earnings ($4).)
The IRS and TurboTax provides no method to submit a substitute Form 1099-SA that way one can for a Form 1009-R. You'll either need to get the HSA custodian to correct the Form 1099-SA to have code 1 in box 3 and $0 in box 2 or you'll need to enter the Form 1099-SA with code 1 and $0 in box 2 to replace the one that you received, then print and mail your tax return and add an explanation statement as to why you reported the distribution with code 1 instead of code 2. In either case you'll need to indicate that none of this was used for qualified medical expenses so that the entire $1,937 is made taxable.
