Let me put it this way:
1. The exclusion is taken out of your pension distribution, whether you paid it or the administrator paid it, that was the change in the Secure Act 2.0).
2. However, in your case, you don't have a pension distribution, because it's $0, being non-taxable.
3. So there is no place to put the $3,000 because it's supposed to be removed from your taxable pension distribution, which you don't have.
Notice the following:
"Section 328 of the SECURE Act 2.0, now Division T of Public Law 117-328, modified the direct payment requirement under HELPS by making it optional and created an alternative to the direct payment method, namely allowing the retirement plan to make the distribution to the retired public safety officer. The retiree could then make the premium payment to the provider and remain eligible for the tax exclusion. This change is effective for distributions made after the date of enactment of the SECURE Act 2.0, which was December 29, 2022."
This exclusion had to be taken from a taxable distribution, but you just didn't have one. I believe that if you had had a second pension distribution that in fact was taxable, that this would have worked for you.
Like I said above, this looks like an untended consequence, in that you can take the $3k exclusion...but only if your pension taxable was actually taxable - and yours isn't.
In other words, you had a pension distribution of $40,000 which was tax-free, so a taxable distribution of $0. You can't make that $40,000 any less taxable, i.e., you can't subtract the $3,000 from zero.
I am thinking that you think that the $3k exclusion can show up someplace else, but it cannot because that is not how the law is written. It must show up as part of line 5b on the 1040....which, in your case, is already $0.
P.S. I haven't done so, but thank you for your service as a police officer.
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