Hawaii is one of a handful of states that requires employers to provide health insurance — not just offer it, but actually provide it, with strict rules on how much employees can be charged. On top of that, Hawaii has its own temporary disability insurance program that's separate from workers' compensation and separate from the federal disability system.
Most mainland payroll resources mention these programs briefly or skip them entirely. This guide covers both in detail, with specifics on what triggers coverage, how the math works, and where employers routinely go wrong.
The Prepaid Health Care Act (PHC)
Hawaii's Prepaid Health Care Act is codified in HRS Chapter 393. It has been in effect since 1974, which makes Hawaii a pioneer in employer-mandated health insurance — the Affordable Care Act came along 36 years later. The state takes it seriously, and the DLIR has enforcement authority.
What triggers PHC coverage?
This is the part that trips up most employers. PHC coverage is required when an employee works 20 or more hours per week for four consecutive weeks. Not full-time employment status. Not a 90-day waiting period. Four consecutive weeks at 20-plus hours per week, and you're required to enroll them.
A part-time employee working 22 hours a week hits this threshold after exactly four weeks. If you're not tracking hours from day one, you may not notice when the obligation kicks in. Most HR systems built outside Hawaii default to full-time vs. part-time status, which doesn't map to this rule at all.
What the employer must provide
Once an employee is eligible, you must provide a qualifying health insurance plan. The plan must be approved under Hawaii law and meet the minimum benefit standards set out in HRS Chapter 393 — these include coverage for hospitalization, surgical care, physician care, and other specified services. A plan that satisfies the federal ACA's minimum essential coverage standard doesn't automatically satisfy Hawaii's PHC standard. You need to confirm with your carrier.
Any major carrier doing business in Hawaii should be able to tell you which plans are PHC-compliant. When in doubt, ask for written confirmation.
The employee contribution cap
Hawaii caps what you can deduct from an employee's paycheck for health insurance under PHC. The rule is: the employee pays the lesser of 1.5% of their gross wages or 50% of the actual monthly premium cost. The employer pays the rest.
Here's how that works in practice. Suppose your health plan costs $700 per month per employee. Fifty percent of that is $350. If the employee earns $3,000/month, 1.5% of their wages is $45. Under the PHC cap, you'd deduct $45 from their paycheck and you'd cover the remaining $655.
Run those numbers the other way: employee earns $30,000/month, 1.5% is $450. The cap becomes 50% of premium ($350), so you deduct $350 and pay $350. The employee's share is always the lower figure.
This is more generous to employees than most mainland employer health plans, and it's not negotiable. You can always pay more than required — you cannot charge employees more than the cap allows.
PHC and payroll deductions
Health insurance premiums under PHC are typically treated as pre-tax deductions under a Section 125 cafeteria plan. That means they reduce the employee's taxable wages for federal income tax, Social Security, and Medicare purposes. Hawaii follows federal treatment here. If you're deducting PHC premiums, confirm with your plan administrator that you have a valid Section 125 plan in place — otherwise the deductions may be taxable.
Who is exempt from PHC?
There are limited exceptions. Certain agricultural workers employed in seasonal capacities under specific circumstances may be excluded. Some categories of family members employed by the business are excluded. And the requirement only applies if you have at least one eligible employee — but the threshold for "eligible" is lower than most people expect. If you regularly have anyone working 20 hours or more per week, you almost certainly have at least one eligible employee.
Don't assume an exception applies without verifying it. The DLIR can be contacted directly for guidance on specific situations.
Temporary Disability Insurance (TDI)
TDI is governed by HRS Chapter 392. It provides partial wage replacement to employees who can't work because of a non-work-related illness or injury. The word "non-work" is important — TDI does not cover workplace injuries. That's workers' compensation. The two programs cover completely separate situations and should never be confused.
TDI vs. workers' comp: the clear line
Workers' comp applies when someone is injured at work or develops an occupational illness from their job. TDI applies when someone is sick or injured in their personal life. An employee who slips on a wet floor in your warehouse — workers' comp. An employee who has surgery for a health condition unrelated to their job — TDI. Pregnancy-related disability is typically covered under TDI.
Both are mandatory in Hawaii. Having workers' comp doesn't satisfy your TDI obligation, and vice versa.
TDI eligibility
An employee becomes eligible for TDI benefits after working at least 14 weeks in the preceding 52-week period and earning at least $400 in wages during that time. These thresholds look at all Hawaii-covered employment, not just time with your business. An employee who spent eight months at a prior Hawaii employer before joining you may already be TDI-eligible on their first day with you.
This is another area where national payroll systems fall short. If they're only tracking tenure with your company, they may not flag employees as TDI-eligible when they actually are.
TDI benefit amounts
The weekly TDI benefit is set by the DLIR and is based on a percentage of the employee's average weekly wage, up to a maximum that the DLIR adjusts annually. The maximum weekly benefit changes each year — verify the current figure on the DLIR website or confirm with your TDI plan administrator. Benefits are paid for up to 26 weeks per disability period.
TDI contributions and payroll deductions
Employees contribute up to 0.5% of their wages toward TDI coverage. The employer can cover more if they choose — either splitting the cost or paying the entire premium. The employee's TDI deduction is withheld from each paycheck and is a post-tax deduction. It appears on the employee's W-2 and may be deductible on their personal return depending on their situation.
Unlike PHC premiums, TDI contributions are not pre-tax. Don't treat them as Section 125 deductions.
Two ways to comply with TDI
Employers can comply with Hawaii's TDI requirement in one of two ways. The first is the state TDI plan, administered through the DLIR. The second is an approved private TDI plan. Private plans must be approved by the DLIR and must provide at least the same level of benefits as the state plan. Many employers use private plans because they can sometimes offer better benefits or more flexibility for employees, while still meeting the statutory minimums.
If you're with a private plan carrier, confirm the plan is currently DLIR-approved. Approval isn't permanent — carriers can lose approval, and an unapproved plan doesn't satisfy your legal obligation.
Where Employers Go Wrong
We've seen the same mistakes repeated enough times that they're worth calling out directly.
Thinking these only apply to full-time employees
Both PHC and TDI apply based on hours worked and wages earned — not on whether you classify someone as full-time. A consistent part-time schedule can trigger PHC. A worker with enough prior employment history can be TDI-eligible from day one. Classification labels don't matter here; actual hours and wages do.
Confusing TDI with workers' comp
We've talked to business owners who thought they were covered for everything because they had workers' comp. Workers' comp is for on-the-job situations. TDI covers the employee's personal health. You need both. They're purchased separately, from separate carriers, with separate coverage rules.
Assuming a national payroll provider handles this
This is the most consequential mistake. Large national payroll companies — the ones with the TV commercials — process payroll across all 50 states. Their systems are built to handle the federal requirements and the rules common to most states. Hawaii's PHC trigger (20 hours/week for 4 consecutive weeks) requires tracking consecutive weekly hours for every employee, which is a calculation most national systems simply don't perform by default.
We've seen Honolulu businesses use a national provider for years and never enroll a single part-time employee in PHC coverage — because the system never flagged the threshold being crossed. If you're currently with a national provider, it's worth asking them directly how they track the 20/4 PHC trigger. The answer will tell you a lot.
Using mainland health plans that don't satisfy PHC
If your business operates in multiple states and you have a company-wide health plan, verify that the Hawaii-specific PHC minimums are met. A plan that covers your Texas and California employees may not satisfy HRS Chapter 393. Always confirm with your carrier.
How PHC and TDI Show Up in Payroll
From a mechanics standpoint, here's what these look like in your payroll system:
- PHC premium deduction: Appears as a pre-tax deduction (assuming a Section 125 plan), reducing the employee's gross for federal and Hawaii income tax withholding, Social Security, and Medicare. The employer's portion is a business expense — not a payroll deduction.
- TDI contribution: Appears as a post-tax deduction — it does not reduce taxable wages. The amount withheld appears in Box 14 of the W-2, labeled something like "Hawaii TDI" or "SDI." Employees may deduct it on Schedule A as a state tax paid.
- Eligibility tracking for PHC: The payroll system needs to track consecutive weeks at 20-plus hours and automatically flag when an employee hits the 4-week mark. If your system doesn't do this, you need a manual process or a different provider.
If you're setting up payroll for the first time or switching providers, this is a good checklist item to confirm explicitly. Ask the provider to demonstrate how they handle PHC eligibility tracking. Don't take "we handle Hawaii" as an answer — ask for specifics on the 20/4 trigger.
Getting It Right From the Start
PHC and TDI compliance isn't complicated once you understand the rules, but the rules are genuinely different from what national guides describe. The triggers, the caps, the deduction treatment, the plan approval requirements — all of it is Hawaii-specific and has been since the 1970s.
We've been processing Hawaii payroll in Honolulu since 1969. Our full-service payroll includes PHC eligibility tracking, TDI deduction setup, and all the Hawaii-specific filings that go with it. Contact us if you want to talk through your setup or get a quote — there's no obligation.
Frequently Asked Questions
Does Hawaii's Prepaid Health Care Act apply to part-time employees?
Yes, if they hit the threshold. PHC coverage is required once an employee has worked 20 or more hours per week for four consecutive weeks. That's the trigger — not whether HR classifies them as full-time. A part-time employee working 25 hours a week triggers coverage after four weeks. Track hours from day one for every employee.
What's the difference between TDI and workers' compensation in Hawaii?
Workers' compensation covers injuries and illnesses that happen at work or because of work. TDI covers the opposite — disability from a non-work-related illness or injury. If an employee breaks a leg on vacation, that's TDI. If they hurt their back lifting boxes at work, that's workers' comp. Both are mandatory in Hawaii. They're separate coverages and should never be confused.
How much can I deduct from an employee's paycheck for Hawaii PHC premiums?
The employee's share of health insurance premiums under PHC is capped at 1.5% of their gross wages or 50% of the actual premium cost — whichever is less. The employer pays the rest. If you have a plan where the total monthly premium is $600, 50% is $300. If 1.5% of the employee's monthly wages is $200, you can only deduct $200. You'd pay $400.
Can I use any health insurance plan to satisfy Hawaii's PHC requirement?
No. The plan must be Hawaii-approved and meet minimum benefit standards under HRS Chapter 393. These standards include coverage for hospitalization, surgical care, and other services specified in the law. Most major carriers operating in Hawaii offer PHC-compliant plans, but you should verify with your carrier that the specific plan you're offering is approved. A national plan that meets federal ACA minimums may not meet Hawaii's standards.
Does TDI apply to employees who have only been with us a few weeks?
TDI eligibility requires that the employee worked at least 14 weeks in the preceding 52-week period and earned at least $400 in wages during that time. So no, a brand-new employee doesn't have TDI coverage on day one — they need to build up the required work history first. But that history can come from prior Hawaii employers. You still need a TDI plan in place from the beginning, because some new hires may already be eligible.
Will a national payroll company handle Hawaii PHC compliance correctly?
Often not well. The specific issue is the 20-hours-for-4-consecutive-weeks trigger. National systems frequently don't track this correctly — they may be built around full-time vs. part-time status rather than the actual Hawaii threshold. We've seen businesses use national providers for years without realizing PHC coverage was never triggered for employees who qualified. If you're with a national provider, ask them directly how they track the PHC eligibility window.