Firstly, the IRS issued a ruling that would have allowed you to reduce your DCFSA contributions mid-year (this is normally not allowed) so that you would not have excess funds.
https://www.irs.gov/pub/irs-drop/n-20-29.pdf
Your employer should have notified you. If you are having the full $5000 amount withheld, that's about $416 per month, so if you stop your FSA immediately, you should end up with a $700 excess instead of a $1500 excess (unless you already stopped your contributions under this provision and you still have $1500 unspent.)
You are allowed to pay a grandparent using FSA funds, provided the care was provided so that you and your spouse could both work or look for work. If care occurred in your home, the caregiver is your household employee. You are not required to withhold and pay social security and medicare tax (because they fall into two exceptions explained here https://www.irs.gov/taxtopics/tc756) but you are required to give them a W-2 at the end of the year. A copy of the W-2 goes to the IRS and your parents will have to include the income on their tax return. How it affects them will depend on their other tax situations. (As well, you could W-2 grandma and grandpa for $500 each, or W-2 one of them for $1000, I don't think it matters.)
If care occurred outside of your home, you do not provide any tax paperwork to the caregiver; they are considered self-employed and are responsible for their own income tax issues.
The FSA administrator is required to verify your expense before reimbursing you, that will typically mean they need a receipt from the caregiver, or canceled checks proving you paid them as employees, and you may be required to provide the benefits administrator with a W-10 form that reports the social security number of the caregiver. You will have to check with the FSA administrator to see what they require.
