My wife works part-time, and typically makes around $20k per year doing so. We try to put as much of her income as we can into her 401k, so that'll be $18500 next year. Next year we're considering using a dependent care FSA to send our daughter to a preschool part of the week while my wife works her part-time job. Now my understanding is that to be eligible to use the FSA, we can't claim a FSA benefit which is larger than the smaller of our two "earned" incomes. My question is, if we put $18500 into her 401k, would her earned income only be $20k-18.5k = $1.5k? Or would her earned income for the purpose of an FSA credit be the full $20k?
In your particular scenario, your wife's earned income would be based on $1500, which would be the max you could take advantage of from your employer's FSA plan. (You probably can't use your wife's FSA since FICA taxes would eat up the remainder of her $20K income.)
However, if your wife's employer offers a Roth 401k option, you could elect to contribute (at least) $3500 to the Roth and the remainder to the Traditional 401k. This would leave her earned income at $5K so you could take the maximum FSA deduction from your employer's plan. Note that by doing this your wife may then have some tax withholding that could possibly prevent her from being able to max out the 401k. You could counter this by increasing the number of exemptions on her W4 form, and then adding extra withholding payments on your W4 to make up for it.