1) Pre-tax income is deducted from the federal tax return. Therefore, when it is flow to the state, the same wage income remains.
Please make sure that the FSA account is Dependent Care Flexible Spending Account.
2) The 2,000 child care expenses should be used for the child care when your wife is in school. That is how the "Should work or look for work or full time student rule" applies. But in terms of enforcement, the U.S. tax system relies on taxpayer's self-compliance and self-reporting. It is like some cities have passengers purchase the correct ticket amounts, and the conductor only sample check people's ticket. We need to self-report and make and keep records on our activities in each categories with dates, activities, etc. to verify our activities.
3) "Can I change my contrubition amount to FSA in the mid year"
The simple answer is no. But the employer may allow extra time to spend the money, etc.
4) The FSA may be able to used for medical expenses also or only. Please verify. It may be towards your benefit. This also answers your question #5 above.
5) As to the highly paid employee, it depends on how many people are also paid as such.
You can choose to ignore test (2) of pay higher than 120,000 in the prior year, if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year.
https://www.irs.gov/pub/irs-pdf/p15b.pdf, page 9.
6) Your income level may be too high to claim child and dependent care credit in the State of California.
Please read this posting fisrt. If you still need extra service, just accept my offer.
Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP