No, it means taking the funds out, not spending them.
The IRS instruction
forms for 5329 and 8889 indicate that your excess contributions will be
treated as if they had not been contributed if you do 3 things.
1. Withdraw your contribution before the
2017 tax due date (April 17)
2. Do not claim a
deduction on the excess - no problem TurboTax knows this already
3. Also withdraw
income earned on the excess contribution.
You can avoid all
penalties by removing the excess contributions (and any of their earnings) from
your HSA and treating them as normal taxable income. Per the IRS:
"You may withdraw some or all of the excess
contributions and not pay the excise tax on the amount withdrawn if you meet
the following conditions.
1) You withdraw the excess contributions by the due
date, including extensions, of your tax return for the year the contributions
were made.
2) You withdraw any income earned on the
withdrawn contributions and include the earnings in “Other income” on your tax
return for the year you withdraw the contributions and earnings."
The IRS spells it
out pretty clearly there, but the removal of the excess contributions and the
earnings on those excess contributions must occur before your tax due date. The
removed is taxable since HSA tax benefits do not apply. Earnings on excess contributions
occur if your HSA is invested or earning interest. Removing those seems fair,
since those investments shouldn’t have been made in the first place. The IRS
solves all of this by saying just remove them, don’t deduct (i.e. pay tax on )
the excess amounts, and declare any earnings as other income.
