@BillM223 Thank you for this answer! It's the best answer to this problem I could find online anywhere.
One clarification: if my wife already had a balance in her HSA going into the year (before we had overlapping FSA and HSA) and she took disbursements for medical expenses, does that change what we should do?
She had a balance of (say) $8000 going into the year, contributed $7000 to it, and took dispersments of $4000 for medical expenses. She isn't allowed to contribute to the HSA, so she needs to withdraw the $7000 she contributed and pay taxes on it. But what about the $4000 in disbursements? Do we need to pay taxes or penalties on that, too, even though she already had a balance from prior year contributions? Or do we need to pay the HSA back for those expenses or something?
