IRS Pub 575, Page 6, details special PSO treatment, which clearly defines the $3k for payments made directly for certain types of insurance plans. Beyond that, there appears to be NO REDUCTION in taxability of 1099-R, Box 7 Code 3 income. The tax benefit comes from the fact that this can be considered Earned Income, thus qualifying recipient for EIC and similar benefits. Link: https://www.irs.gov/publications/p575#en_US_2020_publink100031158
