It sounds like your employer failed the non-discrimination test for highly compensated employees in regards to the dependent care benefit. There’s nothing you can do about this, it all comes down to how the employer creates and manages the plan.
What should happen next is that your employer will put the revised amount of the DCFSA in box 10 of your W-2, and add the taxable amount to your box 1 taxable wages.
Obviously, one consequence is that your taxable income will be higher and so you will owe more income tax. A less obvious consequence is that you may qualify for the dependent care credit in lieu of the DCFSA, especially if you paid for care for two qualifying children.
At this point in 2024, the only way that you could reduce your taxable income is to contribute to a tax deductible IRA. However, assuming that you or your spouse participate in a workplace retirement plan, you may be barred from making a tax deductible IRA contribution based on your income. You can’t contribute extra to a tax deductible 401(k) or other workplace retirement plan, because you can only make contributions through payroll deduction, and the ability to make a retroactive contribution such as for an IRA is not allowed for a workplace plan. (You could also make a retroactive contribution to an HSA, health savings account, but only if you have not already maximized your contributions and you must be enrolled in a qualifying HDHP insurance plan.)
