Education

1.  You are going to take the overcontribution and earnings out.  The 6% penalty is assessed on this total amount, yes.

2. You can absolutely open a new coverdell account and put the amount in that you have pulled out of the other two.  But remember - the limitations are per beneficiary as well so you can't open an account for one of your children that you have already maxxed out contributions for.

3. Yes, any qualified education expense would qualify to remove the penalty as long as it is for the named beneficiary of the account.  

Qualified educational expenses are for elementary and secondary educational institutions, kindergarten through grade 12, and postsecondary educational institutions, such as colleges or universities, that participate in the student aid programs administered by the US Department of Education. The institution can be public, private, or religious. Qualifying expenses, if they are incurred because of enrollment or attendance at the institution, include:

• tuition and fees,
• books, supplies, and equipment,
• academic tutoring, and
• services provided for a beneficiary with special needs.

However, the following expenses are qualified only if they are required by the educational institution:

• room and board,
• uniforms,
• transportation, and
• other supplementary items and services, including extended day programs.

That all comes from here.

4. No.  The account has a named beneficiary.

5. Yes, you can just enter it all in the year that you receive the 1099.

6. Just form 5329 by itself is fine - unless the overcontributions are used to pay qualified education expenses in which case there is no reporting requirement at all.

7. Yes.

8.  Pay educational expenses with the overcontribution and earnings.