Are you sure that Form 5329 is showing nonzero amounts on lines 48 and 49? If you indicated that $130 of your code 1 distribution was not used for medical expenses, that amount should be present on Form 5329 line 44. This is automatic in TurboTax.
Removing the earnings on the $130 and paying the 6% excess contribution penalty on the $130 are mutually exclusive. Only the $10 distributed before the due date of your 2019 tax return needs to have had attributable earning included. The "extra" earnings distributed are technically a regular distribution, not related to the distributions of the excesses. If
The excess contribution for 2019 returned in 2020 would be reported on a code 2 2020 Form 1099-SA, not a 2019 Form 1099-SA; I failed to consider that correctly in my previous response when I was describing the form reporting the return of excess contribution. I think I was under the impression that the return of excess contribution occurred in January 2019 instead of in 2020. If the IRS ever digs into it, which is unlikely, that could detect a discrepancy between the amounts reported on your 2018, 2019 and 2020 Forms 5498, your 2019 tax return and the amounts on the code 2 2020 Form 1099-SA, demonstrating that you obtained a return of contribution of more than your actual excess. I've never heard of the IRS catching this, but IRS guidance does indicate that the amount distributed beyond the amount of the excess and the attributable earnings is to be treated as a regular distribution.
