My setting is different: "When locked: after 1 minute"."When locked: Immediately"
Looking at Xorg.0.log entries that SDDM makes, I'm noticing that the greeter part just drops keyboard and mouse when I get kicked out of the Wayland session back to the greeter. SSH-ing in and restarting SDDM gets the keyboard and mouse back.
I did delete the file, but that did not make a difference for my problem.mouse (but not the keyboard) was non-functional until I deleted 40-libinput.conf
Right now, I'm actually doing some research on getting SDDM to start in a Wayland compositor rather than Xorg. That's because I'm thinking that passing the keyboad/mouse works from Xorg to Wayland, but not the other way around, and that it should work in both directions, not just one.
Uninstalling/disabling SDDM and starting Wayland from command-line is still on the table on my end of things.