The Hong Kong government has announced the abolishment of the MPF offsetting mechanism. This significant change will impact how employers handle statutory severance payments (SP) and long service payments (LSP). This article provides an overview of the changes and practical tips for employers to prepare for this transition. 

What is the MPF offsetting mechanism?

Under the Mandatory Provident Fund (“MPF”) Schemes Ordinance, employers are currently entitled to offset SP or LSP against employees’ MPF benefits derived from employers’ contributions. 

How this usually works in practice is this: The employer will first pay out SP/LSP to the employee and then apply to the MPF trustee for a refund of the amount paid. The refund will then be withdrawn from the benefits in the employee’s MPF account which are derived from the employer’s contributions.

Why is it being abolished?

The MPF offsetting mechanism has been criticised for allowing employers to dip into employees’ retirement funds in order to discharge their statutory financial obligations to make SP/LSP upon termination of employment.

Often, where the offset is applied by an employer, the employee’s SP/LSP will substantially or even completely be reduced. As a result, it diminishes the employee’s retirement protection. 

After years of debate, the Hong Kong government finally decided to abolish the MPF offsetting mechanism with a view to enhance retirement protection to Hong Kong employees.

When is it being abolished?

The MPF offsetting mechanism will be abolished on 1 May 2025.

What are the transitional arrangements?

From 1 May 2025, employers will no longer be able to offset SP/LSP against an employee’s MPF benefits derived from the employer’s mandatory contributions. An employer can still offset SP/LSP against an employee’s MPF benefits derived from the employer’s voluntary contributions.

In relation to employees who commenced employment with the employer before 1 May 2025, and whose employment terminates after 1 May 2025, a transitional arrangement applies. Upon termination, their SP/LSP will be split into two components:

  • SP/LSP attributable to the period of employment up to 30 April 2025: This portion can still be offset against employees’ MPF benefits derived from employers’ mandatory and voluntary contributions.
  • SP/LSP attributable to the period of employment from 1 May 2025: This portion cannot be offset against employees’ MPF benefits derived from employers’ mandatory contributions but employers may continue to offset it against employees’ MPF benefits derived from employers’ voluntary contributions.

Practical tips

1. Update payroll system

Employers with employees who commenced employment before 1 May 2025 will need to update their payroll system to facilitate the calculation of the portion of SP/LSP that continues to be eligible for MPF offsetting after 1 May 2025, and that portion which would no longer be eligible for MPF offsetting after 1 May 2025. 

The payroll system would also need to be configured for new joiners after this date where none of their MPF benefits derived from the employer’s mandatory contributions can be offset against SP / LSP, but still allow for SP/LSP to be offset against MPF benefits derived from the employer’s voluntary contributions, if any, and should employers wish to apply the offset.

Employers who engage a third-party payroll service provider for their payroll needs should contact their payroll service provider as soon as possible to make arrangements for their payroll system to be updated.

2. Update template documents and policies

Employers should review their template employment contracts and termination letters and consider whether they need to be updated as a result of the abolition of the MPF offsetting mechanism. For example, if the termination letter template currently contains wording about offsetting SP/LSP against MPF benefits, such wording may need to be amended as it may no longer be in compliance with the law after 1 May 2025. Employers should also review their handbooks/policies and consider whether any consequential updates need to be made to the same as well.

3. Train HR staff 

Employers should provide appropriate training to their HR staff about the abolishment of the MPF offsetting mechanism and how this impacts internal processes. For example, HR staff would need to be aware that for new joiners after 1 May 2025, the employer would no longer be able to submit an application to the MPF trustee for a refund of the SP/LSP paid to the employee when their employment is terminated. As for employees who commenced employment before 1 May 2025, HR staff would need to familiarise themselves with how to calculate the portion of SP/LSP which can be offset and the portion which cannot be offset.

4. Use the “EasyCal” Calculation Tool

The Hong Kong Labour Department has developed a calculation tool (“EasyCal”) to facilitate employers in calculating SP/LSP after the abolition of the MPF offsetting mechanism. This is a handy tool for employers who need a quick reference on how much SP/LSP may be payable in relation to a particular employee. EasyCal can be accessed here. 

5. Learn about the Subsidy Scheme 

A primary concern for employers has been that the abolishment of the MPF offsetting mechanism would place a heavy financial burden on employers. To this end, the Hong Kong government will introduce a 25-year subsidy scheme to help alleviate some of the financial pressure borne by employers in relation to SP/LSP which they may need to pay after 1 May 2025. 

During the first three years of the subsidy scheme, the employer's liability in relation to the portion of SP/LSP after 1 May 2025 will be capped at HK$3,000 per employee (provided that the total SP/LSP liability does not exceed HK$500,000 per year) with the government bearing the rest of the costs. From the fourth year onwards, the payment caps will gradually rise, and the government subsidy amount will be reduced progressively.

The subsidy will be provided to employers by way of reimbursement. Employers will be required to pay SP/LSP to the employee first, then apply to the government for reimbursement of the subsidised amount. The government will provide more details on the application process in due course. Employers may refer to the Labour Department’s dedicated page on the subsidy scheme for the latest announcements.

How we can help

The abolishment of the MPF offsetting mechanism represents a significant change for employers (and employees) in Hong Kong. For employers, by taking proactive steps to update payroll systems, documents, policies and by training HR staff, employers can ensure a smooth transition. Further, understanding and utilising the government subsidy scheme will help mitigate the employer’s financial impact of these changes. 

We would be pleased to assist with reviewing your template employment contracts, termination letters and policies to ensure compliance with the law after 1 May 2025. If you require advice or have any questions on the abolition of the MPF offsetting mechanism, please feel free to reach out to us.