1. The earnings generally just stay in the Roth IRA. The 6% penalty is essentially to offset the benefit of being about to leave the earnings in the account. If the $1,250 contribution was your daughter's first Roth IRA contribution, I'm not sure that the IRS has provided clear guidance on what should be done when the entire balance in the individual's Roth IRAs is based on excess contributions. Now that your daughter has been able to make a permissible Roth IRA contribution, I would not worry about the earnings that stayed in the account
2. That's all that's necessary to eliminate bring the excess-contribution penalties to an end.
3. There is nothing to report.
4. No. This code-J 2022 Form 1099-R is reportable only on your daughter's 2022 tax return.
With regard to the rest of the questions, I think there is a better way to deal with this, so I'll skip the rest of the questions. Absent a substantial investment gain in 2021 on her 2021 contribution, what should have happened was for your daughter to request a return of an additional $1,250 of her contribution for 2021. This would have made room to apply the $1,250 excess from 2020 as part of her 2021 contribution, eliminating the 6% penalty for 2021. This can still be done since the March 4, 2022 regular distribution can still be rolled over back into her Roth IRA within 60 days. (This rollover would count toward the one-rollover-per-12-months limitation.) I would consider making the return of contribution of $1,250 of the 2021 contribution first, resulting in a distribution of $1,250 plus attributable earnings, then rolling over the March 4 distribution before May 3, 2022. Like the first return of contribution, the attributable earnings distributed will be subject to income tax and a 10% early-distribution penalty on the 2021 tax return. (If the gains are substantial, though, say, 30% or more, it would probably be better to leave things as they are and pay the 6% excess contribution penalty for 2021 as it stands now.)
