Option 1 is the preferred option. The corrected W-2 has the correct compensation amounts in Box 1 which is where it should be. You can ignore the 1099-R as you are paying the tax in 2018 via the increased Box 1 amount. Keep records in case you have to explain the unreported 1099-R. However, if any of the amounts on the 1099-R represent earnings on the excess contribution, the amount of those earnings should be included in income also.
