The proper code in box 7 of Form 1099-R for this is code 1 because the IRA custodian has no way to know if you qualify for an HSA contribution or not.
Provided that the entire distribution was a qualified HSA Funding Distribution (HFD), this distribution is not reportable on Form 5329 at all because none of it is taxable. All that is necessary is that the HFD was included on Form 1040 line 15a or Form 1040A line 11a, excluded from line 15b or 11b, and that the notation "HFD" is included next to the line. TurboTax does all of this automatically when you enter the Form 1099-R and you indicate the amount that what transferred to an HSA.
