There are 2 ways to remove the Penalty. IF the contributions were through the W-2 then on the 8889 go to the Line 12 Excess Employer Contributions Smart Worksheet and enter the amount of line B. If the contributions were entered directly on line 2 the Tax Help for line 2 states "Do not include any excess contributions that were withdrawn by the due date of the return. As noted in the IRS instructions to line 13 of this form, such amounts are treated as if they had not been contributed."