"The above sounds a lot like option 2 that you outlined."
Yes, it is.
"I would need to withdraw the excess contribution from 2020 in the amount of $X, where X is the excess contribution from 2019"
As I explained above, TurboTax will not let you do this. It's easy to think of the 2019 excess rolling over and causing an excess in 2020 which you could withdraw, but you can't. Even if TurboTax tells you that you have an excess in 2020 (I am assuming it is saying this), when you tell TurboTax how much you will withdraw, it will stop you from withdrawing the amount of the excess caused by 2019. Try it, you'll see.
"Why is this, if reducing my 2020 contributions such that X + 2020 contributions = the max contributions ($3550)?"
The law lets you withdraw excess contributions up until the due date of the return (as extended). If you just carried over the excess to the next year, then withdrew the excess the following year by that year's due date, that would defeat the clear intent of the law - this is why you can't withdraw 2019's excess in 2021.
"Then, when I file my 2021 taxes, since 2020 will not have had an excess, will I officially have this cleaned up?"
2020 will say it has an excess, but in fact, you did not over contribute in 2020, but in 2019. So, in a way, you are right that 2020 did not have per se an excess, but the 2019 excess is carrying forward.
So in 2021, when you sharply reduce your HSA contributions (probably to nearly zero), then, yes, the 2019 excess that has been carried over twice will be applied against the 2021 HSA contribution limit, and the carryover will be gone.
However, have you already been contributing in 2021? Or were you able to stop in time?
"there is type 2 1099-SA produced for situations like this. They are produced after the tax deadline is over."
There is only one type of 1099-SA; what they meant is that it would have a distribution code of "2". If I am following your situation correctly, I don't think you will be able to withdraw any excess for 2020, so you won't get a 1099-SA for option 2. And if all goes well, in 2021, you will be able to charge all of the 2019 excess off against the 2021 HSA contribution limit, which means that there won't be a an excess to withdraw in 2021 anyway.
And normally, when you withdraw the excess in a timely manner, you don't need a 1099-SA for the current year, because TurboTax automatically adds the amount of the excess (whether or not you withdraw it) to Other Income, and the following year when the 1099-SA is sent reporting the earnings on the excess, this is entered for that following year.
You normally don't get a corrected 1099-SA unless you made a "mistaken distribution", which is not the case here.
Now, have I thoroughly garbled up everything?
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