Yes, it is his issue. He can't claim a tax break using an FSA unless the child(ren) physically live with him more than half the year, no matter what agreements you might have regarding sharing the dependent exemption and child tax credit. (The dependent exemption and child tax credit can be released to the non-custodial parent if your agreement calls for that, but only the custodial parent can use a dependent care FSA.)
The income gets added back to his taxable income on line 7 and he pays regular income tax on it. Fortunately there is no additional penalty.
