If you are looking at the summary screen, then HSA distribution is listed as income; that's what it is because it is money you received from a tax deferred account. Since you have entered it as used for medical expenses, it is NOT taxable income. You can verify this by looking at Form 1040, line 21. This line should not show an HSA entry as income.

Your 1099-SA distribution should not add to your income. Go through the TurboTax 1099-SA interview again.  

• Type 1099-sa in the search box and click search.
• Click on Jump to 1099-sa.
• Edit your 1099-sa
• On the Tell us about the health-related accounts you had in 2016, check Health Savings Account.
• Continue with the onscreen interview until you get to the Let's get the numbers from your 1099-SA. 
• On the Did you spend your HSA money on medical expenses only? screen, click Yes.
• See the screenshots below.

If you aren't enrolled in a High Deductible Plan in 2016, in addition to the above, make sure you:

• Answer No, on the Was XXX enrolled in a HDHP in 2016? screen.
• On the Let's maximize your contribution limit screen, make sure you enter None. See the screenshot below.
• On the Did you overfund your HSA in 2015? screen, click No.
• On the Additional Tax for Failure to Maintain HDHP coverage screen, click No.
• Continue with the onscreen interview.

If you are enrolled in a High Deductible Plan in 2016, make sure you:

• On the Let's enter XXX HSA contributions, do not enter anything if your W-2 Box 12 has a Code W. It is already entered. 
• Answer Yes, on the Was XXX enrolled in a HDHP in 2016? screen. Also, choose the type of plan you had.
• On the Did you overfund your HSA in 2015? screen, click No.
  
• On the Additional Tax for Failure to Maintain HDHP coverage screen, click No.
• Continue with the onscreen interview.