It’s really no different than the Mormon scheme.
"Now, it may be contended that a judgment, with some degree of salvation for all, encourages the sinner to pursue his dark ways. Not so. However generous the judgment, it is measured by our works. Our punishment will be the heavy regret that we might have received a greater reward, a higher kingdom, had our lives conformed more nearly to truth. Such remorse may yield keener pain than physical torture." (Understandable Religion, p. 89)
While Widtsoe is careful not to call a heavenly kingdom "hell", he is nonetheless certain that there will be a keen regret for lost opportunities:
"Humanity will be grouped according to their works in three main divisions: Celestial (like the sun), Telestial (like the moon), Terrestrial (like the earth). Within each group there will be many gradations and divisions, until from the lowest to the highest in all groups there will be a series of gradually ascending glories. There can be no talk of a hell, except for the few 'sons of Perdition,' but undoubtedly the regret for lost opportunities will be keen among those in the lower degrees of glory." (Program of The Church of Jesus Christ of Latter-day Saints, p. 226)
Joseph Fielding Smith, on the other hand, considers the tormenting regret experienced in the bottom two heavenly kingdoms and concludes "in that sense it will be hell":
"This earth will become a celestial kingdom when it is sanctified. Those who enter the terrestrial kingdom will have to go to some other sphere which will be prepared for them. Those who enter the telestial kingdom, likewise will have to go to some earth which is prepared for them, and there will be another place which is hell where the devil and those who are punished to go with him will dwell. Of course, those who enter the telestial kingdom, and those who enter the terrestrial kingdom will have the eternal punishment which will come to them in knowing that they might, if they had kept the commandments of the Lord, have returned to his presence as his sons and his daughters. This will be a torment to them, and in that sense it will be hell." (Answers to Gospel Questions, v. 2, p. 210)
This line of thinking is interesting in light of Joseph Smith's following teaching:
"A man is his own tormenter and his own condemner. Hence the saying, They shall go into the lake that burns with fire and brimstone. The torment of disappointment in the mind of man is as exquisite as a lake burning with fire and brimstone" (TPJS, p. 357)
The entry in the Encyclopedia of Mormonism on "Damnation" essentially explains that the bottom two kingdoms of heaven are kingdoms of damnation:
"Just as there are varying degrees and types of salvation, coupled with eternal progression in some areas (D&C 76:96-98; 131:1-4), so are there varying degrees and types of damnation. In LDS doctrine, to be damned means to be stopped, blocked, or limited in one's progress. Individuals are damned whenever they are prevented from reaching their full potential as children of God. Damnation is falling short of what one might have enjoyed if one had received and been faithful to the whole law of the gospel. In this sense, all who do not achieve the highest degree of the Celestial Kingdom are damned, even though they are saved in some degree of glory."
Mormonism really doesn't HAVE a 'hell'.
AFTERLIFE: The Mormon afterlife is divided up into four levels. From the lowest to the highest they are: hell, and then three levels of heaven: the telestial, the terrestrial, and the place where God dwells, the celestial (also called the kingdom of God). The celestial is also divided, the highest level being "exaltation," or becoming a God.
HEAVEN-The Mormon church teaches there are three levels of heaven (three "degrees of glory"):
HELL: A place of torment from which the worst of sinners are resurrected (if they repent) into the Telestial kingdom; only a limited number remain in hell forever, - the devil and the demons and apostates who consciously reject and work against Mormonism.
Mormonism has taught that those in the Telestial kingdom will have paid for their own sins in spirit prison, a temporary hell which serves as a place of purging before entrance into heaven (cf. D&C 138: 58-59).
Orson F. Whitney preached:
"But those who reject the Gospel altogether and are besotted and crimestained---what of them? It is written that they will be thrust down to hell; even the murderer, the liar, the sorcerer, and the whoremonger. They will, in short, be damned. But they will only be damned to the extent justified by their sins. Even for them there is hope, after they have 'paid the uttermost farthing.' They will be punished, as all men must be, for neglect of duty, for transgression of the laws of God; but after they have been punished sufficiently, they will be brought forth and saved in a glory of which the stars in heaven are typical." ("The Three Great Teachers", May 8, 1898; Brian H. Stuy, ed., Collected Discourses 1886-1898, v. 5)
Chapter 41 of the 2009 Gospel Principles manual quotes D&C 19 and concurs the same:
"Also in the spirit prison are those who rejected the gospel after it was preached to them on earth or in the spirit prison. These spirits suffer in a condition known as hell. They have removed themselves from the mercy of Jesus Christ, who said, 'Behold, I, God, have suffered these things for all, that they might not suffer if they would repent; but if they would not repent they must suffer even as I; which suffering caused myself, even God, the greatest of all, to tremble because of pain, and to bleed at every pore, and to suffer both body and spirit' (D&C 19:16-18). After suffering in full for their sins, they will be allowed, through the Atonement of Jesus Christ, to inherit the lowest degree of glory, which is the telestial kingdom" (Gospel Principles, 2009, p. 244).
Hell is reserved for apostates from Mormonism, and them alone.