The movement of funds from an IRA to an HSA is always a distribution from the IRA, hence the name "qualified HSA funding distribution." See section 408(d)(9)(B) which defines this as a distribution from the IRA. With regard to IRAs and HSAs, a nonreportable transfer refers to the movement of funds from an IRA or HSA to a like-kind account (IRS Notice 78-406), not to the movement of funds from an IRA to an HSA.
The general instructions for Forms 1099 indicate that Form 1099-R must be filed for distributions of $10 or more.
The instructions from Form 1099-R indicate that there is no special reporting requirement for an HFD, meaning that it's to be reported as an ordinary distribution as I described previously. Although you requested an HFD, the IRA custodian has no way to know if the distribution actually qualifies as an HFD. If it doesn't qualify (not eligible to have made that amount of HSA contribution), it must be reported on your tax return as if it's not an HFD. Thinking again about the code in box 7 of the Form 1099-R, I think it should be code 1, not code 2, since code 2 would be giving special treatment to the distribution.
