42 CFR §436.220

1. (a)The agency may provide Medicaid to any group or groups of individuals specified under § 436.201(a)(4), (a)(5), and (a)(6) who would meet the income and resource requirements under the State's AFDC plan if their work-related child care costs were paid from their earnings rather than by a State agency as a service expenditure.
2. (b)The agency may use this option only if the State's AFDC plan deducts work-related child care costs from income to determine the amount of AFDC.