Yes, this appears to be the case.
Generally, this refers to pension plans that are taxed on the federal level but are not taxed in Hawaii. The following is from the Hawaii N-11 instructions at http://files.hawaii.gov/tax/forms/2018/n11ins.pdf.
"Line 13
Pensions
Hawaii does not tax qualifying distributions from an employer-funded pension plan. If you received qualifying distributions from an employer-funded profit sharing, defined contribution, or defined benefit plan, or from a government retirement system (e.g., federal civil service, military pension, state or county retirement system), enter the qualifying amount here.
Nontaxable Distributions
The following lines describe what qualifying distributions are. These qualifying distributions were included in your federal AGI and will be excluded on this line. For a distribution to qualify, it must be paid by a pension plan by reason of retirement, disability, or death. The pension plan does not have to be a “qualified plan” as defined in IRC section 401.
Employer-Funded Pension Plans
The following three types of distributions are not taxed by Hawaii and should be included on line 13:
(1) Pension or annuity distributions from a public (i.e., government) retirement system (e.g., federal civil service annuity, military pension, state or county retirement system), unless voluntary contributions were made by an employee under an elective right. For more information, see section 18-235-7-02, HAR.
(2) Distributions from a private employer pension plan received upon retirement (including early retirement and disability retirement) if the employee did not contribute to the pension plan.
(3) Distributions from a pension plan at age 70-1/2 that are made to comply with the federal mandatory payout rule do qualify as a retirement payment whether or not the employee is still working full time.
Distributions from a private employer pension plan received upon retirement are partially taxed by Hawaii if the employee contributed to the pension plan."
This last item (#3) is referring to RMDs from a pension. The net effect appears to be that you don't pay tax in Hawaii on pension income that derived from employer contributions.
Since we at AnswerXchange have no idea how much your wife's employer contributed, I encourage you to speak to the benefits department or contact a local tax professional.
