On 1 May 2025, Hong Kong abolished the Mandatory Provident Fund (MPF) offsetting arrangement, ending employers’ ability to use mandatory MPF contributions to offset severance payments (SP) and long service payments (LSP). This reform, enacted through the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022, aims to strengthen employee retirement protections while introducing new obligations for employers.
This article provides a comprehensive overview of the abolition, including its impact on employers, especially small and medium-sized enterprises (SMEs), employees transitional arrangements, and government support measures. By understanding these changes, employers can ensure compliance, manage financial implications, and safeguard employee welfare.
Key Takeaways
End of Offsetting (May 2025)
Employers can no longer use MPF contributions to offset severance or long service payments, ensuring employees retain their full retirement savings.
Stronger Retirement Protection
Employees gain greater financial security as mandatory MPF funds remain intact, while SP and LSP must be paid in full.
Increased Employer Responsibilities
Businesses face higher payroll and accounting obligations, with full recognition of SP/LSP liabilities and updated record-keeping requirements.
SME Challenges and Support
Small and medium-sized enterprises may face cash flow pressures, but the government’s 25-year subsidy scheme offers financial relief.
Need for Strategic Planning
Employers should budget for higher costs, update payroll systems, and leverage advisory support to ensure compliance and smooth transition.
What Is The MPF Offsetting Scheme?
The Mandatory Provident Fund (MPF) offsetting scheme in Hong Kong was a mechanism that allowed employers to deduct any severance payment (SP) or long service payment (LSP) they owed an employee by using the contributions already made to the employee’s MPF account.
When an employee qualified for SP or LSP such as in cases of redundancy or long service the employer would calculate the total payment due. The employer could then offset their own MPF contributions, including accrued benefits, against this amount. The employee would receive the remaining balance, if any.
Example: If an employee was entitled to HK$100,000 in severance pay and the employer had contributed HK$40,000 to the employee’s MPF account, the employer would only need to pay HK$60,000 out of pocket (HK$100,000 − HK$40,000).
Why Was The Offset Arrangement Abolished?
Despite its benefits to employers, the MPF offsetting scheme often reduced employees’ retirement savings, undermining the original goal of ensuring financial security in retirement. Many workers saw a portion of their MPF accounts depleted to cover severance or long service payments, which could significantly affect their long-term retirement funds.
The Hong Kong government recognized that preserving mandatory MPF contributions was crucial for employee retirement security. As a result, the offsetting mechanism was scheduled for abolition to guarantee that workers retain their full MPF funds while still receiving SP or LSP.
What Are The Latest MPF Updates For 2025?
To address the shortcomings of the offset scheme, the Employment and Retirement Schemes Legislation (Offsetting Arrangement) Bill 2022 was passed in June 2022. Key updates effective from 1 May 2025 include:
- Employers can no longer use MPF contributions to offset SP or LSP for employment periods after the Transition date.
- Workers will receive their full severance and long service payments without deductions from their MPF accounts.
This reform strengthens employee retirement protections while requiring employers to adjust payroll systems, budgeting, and financial reporting to reflect full SP and LSP obligations.
The abolition ensures that mandatory MPF contributions remain intact, enhancing retirement security for employees and marking a significant shift in Hong Kong’s employment and retirement landscape.
Impacts on Employers
The abolition of the MPF offsetting arrangement in Hong Kong significantly changes employer obligations. From 1 May 2025, employers must pay full severance payments (SP) and long service payments (LSP) without using mandatory MPF contributions for offsetting. This shift has notable financial, administrative, and operational implications.
Increased Operational Costs: Employers now face higher employment costs, as SP and LSP must be paid in full. For example, an employee entitled to HK$100,000 in severance pay will receive the full amount, rather than having it partially offset by HK$40,000 in MPF contributions. Businesses must budget for these payments, which can affect cash flow, particularly in larger redundancies or restructurings.
Financial Reporting: Companies must recognize the full liabilities for SP and LSP in their accounts, reflecting the complete obligation in financial statements. This may result in increased reported liabilities and requires careful planning for accurate accounting.
Payroll Updates for Compliance: Payroll systems must be updated to handle the new rules. Employers need to separate pre-transition and post-transition service periods for employees hired before 1 May 2025, ensuring SP and LSP calculations align with the new requirements. Accurate record-keeping is crucial to demonstrate compliance in audits or government reviews.
Impacts on SMEs
Cash Flow Pressures
Small and medium-sized enterprises (SMEs) are particularly affected, as higher SP and LSP payments can strain limited cash reserves. Unlike larger corporations, SMEs may find it challenging to absorb these additional expenses without adjusting budgets or delaying other investments.
Administrative Burden
SMEs must update payroll systems, maintain detailed wage records, and calculate SP and LSP for pre- and post-transition employment periods. This administrative effort can be time-consuming, requiring careful record retention and monitoring.
Government Subsidies as Support
To alleviate the financial burden, the Hong Kong government has introduced a 25-year subsidy scheme for micro, small, and medium-sized enterprises (MSMEs). For the first three years, employers’ liability for the post-transition portion of SP/LSP is capped, with the government reimbursing the excess. While this support mitigates costs, SMEs must still handle upfront payments and apply for reimbursement through the Labour Department.
Impacts on Employees
The abolition of the MPF offsetting arrangement in Hong Kong on 1 May 2025 brings significant benefits for employees, enhancing retirement security and ensuring fair treatment across employment periods.
MPF Savings Preserved
With the removal of the offset mechanism, employers can no longer deduct severance payments (SP) or long service payments (LSP) from mandatory MPF contributions. Employees’ MPF accounts remain intact, safeguarding retirement savings and providing long-term financial security, especially for those with extended service or facing redundancy.
Full SP/LSP Entitlements Guaranteed Post-Transition
Under the new regime, employees are entitled to receive the full amount of SP and LSP for employment periods starting on or after 1 May 2025. This ensures that workers no longer lose part of their earned benefits to MPF deductions, guaranteeing fair compensation upon termination or redundancy.
Transitional Arrangement Ensures Fair Treatment for Pre-Transition Employment Periods
For employees hired before the Transition Date, SP and LSP entitlements are calculated in two portions: the pre-transition portion, based on salary as of April 2025, and the post-transition portion, based on the final salary at termination. This dual calculation preserves offsetting rights for prior service while aligning post-transition payments with the new rules, maintaining fairness and preventing abrupt financial disadvantages for long-serving employees.
Overall, these changes strengthen employee protections, improve financial outcomes upon termination, and ensure that Hong Kong’s MPF system fulfills its original purpose of supporting retirement savings.
Transitional Arrangements
The abolition of the MPF offsetting arrangement in Hong Kong introduces clear transitional measures to balance employee protections with employer obligations.
Not Retrospective
The reform is effective from 1 May 2025, meaning it does not apply retroactively. Employers may still offset severance payments (SP) and long service payments (LSP) for employment periods before the Transition Date using mandatory and voluntary MPF contributions. This ensures that pre-transition employment rights are preserved while aligning future obligations with the new regulatory framework.
Dual Calculation Method
To ensure fair treatment for employees hired before the Transition Date, a dual calculation method applies:
- Pre-transition portion: SP/LSP is calculated based on the employee’s salary as of April 2025, using the existing offsetting arrangement.
- Post-transition portion: SP/LSP is calculated on the employee’s final salary at termination, without deductions from mandatory MPF contributions. Voluntary contributions or gratuities may still be used for offsetting if applicable.
Note: Employers’ voluntary MPF contributions (ERVC) and gratuities based on service years may still be used to offset SP/LSP even after 1 May 2025.”
This approach balances fairness, maintaining offsetting rights for prior service while safeguarding retirement savings for future employment periods.
Caps and Limits
SP and LSP calculations remain subject to statutory caps. Monthly wages are capped at HK$22,500, and total SP/LSP entitlements, combining pre- and post-transition portions, cannot exceed HK$390,000. Any excess is deducted from the post-transition portion, ensuring compliance with statutory limits while preventing excessive financial strain on employers.
Record-Keeping Requirements
Employers must retain accurate wage and employment records to comply with the transitional framework. This includes maintaining detailed records for the 12 months preceding 1 May 2025 or the full employment period if shorter—to accurately calculate pre-transition entitlements. Proper documentation is essential for audits, compliance, and subsidy claims under government support schemes.
By implementing these transitional arrangements, Hong Kong ensures a smooth shift from the old offsetting system to the new regime, protecting employees’ retirement savings while giving employers clarity on their financial and administrative responsibilities.
Government Support Measures
To help employers, particularly small and medium-sized enterprises (SMEs), manage the financial impact of the MPF offsetting abolition, the Hong Kong government has introduced a comprehensive 25-year subsidy scheme valued at HK$33.2 billion. This long-term support aims to ease the burden of paying full severance payments (SP) and long service payments (LSP) while ensuring employees’ retirement savings remain intact.
Subsidy Details for the First Three Years (2025–2028)
During the initial phase, from 1 May 2025 to 30 April 2028, employer liability for the post-transition portion of SP and LSP is capped at HK$3,000 per employee, with an annual cap of HK$500,000 per employer. Any excess costs beyond these limits are reimbursed by the government, reducing the immediate financial pressure on SMEs and micro-enterprises.
Gradual Phase-Out Over 25 Years
The subsidy is designed to gradually phase out over a 25-year period, giving employers ample time to adjust to the new obligations. In the later years, employer contributions increase, and the government’s reimbursement gradually decreases until the subsidy fully ends, allowing the market to stabilize while protecting workers’ retirement savings throughout the transition period.
Goals of the Scheme
The primary objectives of the government support measures are:
- Support SMEs: Reduce cash flow pressures for small businesses facing increased SP and LSP costs.
- Protect Employee Retirement Savings: Ensure that all mandatory MPF contributions remain untouched, guaranteeing employees receive their full retirement benefits.
- Smooth Transition: Allow businesses to adapt payroll systems and financial planning gradually without abrupt financial strain.
By implementing this subsidy scheme, the Hong Kong government balances the twin priorities of employee protection and business sustainability, ensuring a fair and manageable transition for employers while strengthening retirement security for the workforce.
Key Considerations For Employers
The abolition of the MPF offsetting arrangement introduces new responsibilities for employers. To ensure compliance and smooth adaptation, businesses should focus on the following key considerations:
1. Update Payroll and Accounting Systems
Employers must revise payroll software and accounting systems to reflect the full SP and LSP liabilities without relying on MPF contributions for offsetting. This includes implementing dual calculation mechanisms for employees hired before the Transition Date (1 May 2025) to separate pre- and post-transition portions of SP/LSP.
2. Budget for Higher SP/LSP Costs
With mandatory MPF contributions no longer deductible, employers need to account for increased financial obligations. Businesses, especially SMEs, should adjust their budgets and cash flow planning to accommodate higher severance and long service payments while avoiding potential liquidity issues.
3. Maintain Detailed Employee Wage Records
Accurate record-keeping is critical. Employers must retain wage records for the 12 months preceding 1 May 2025 for employees hired before the Transition Date, or for the full employment period if shorter. These records are essential for calculating pre-transition SP/LSP accurately and for ensuring compliance during audits.
4. Apply for Government Subsidies When Eligible
The government’s 25-year subsidy scheme provides financial relief for SMEs and micro-enterprises. Employers should familiarize themselves with the application process and eligibility criteria to claim reimbursements for SP/LSP costs exceeding the employer liability cap, maximizing available support.
5. Communicate Clearly with Employees
Transparent communication with staff is vital to manage expectations and reduce misunderstandings. Employers should explain how SP and LSP calculations will change, clarify employees’ rights under the new system, and outline the government’s support measures to ensure confidence in the transition.
By proactively addressing these considerations, employers can mitigate operational and financial risks, remain compliant with Hong Kong employment law, and maintain employee trust during this significant reform.
Conclusion
The abolition of the MPF offsetting arrangement marks a significant step forward in strengthening employee retirement protection in Hong Kong. Employees now retain their full MPF savings, ensuring enhanced financial security, particularly for long-serving and redundant workers.
For employers, particularly SMEs, the reform brings higher financial and administrative responsibilities. Companies must pay full severance and long service payments, update payroll and accounting systems, maintain detailed wage records, and navigate transitional calculations for pre- and post-transition employment periods.
With careful planning and utilization of government support, including the 25-year subsidy scheme, businesses can ensure smooth compliance while safeguarding employee welfare. Proactive adaptation allows employers to minimize financial strain, maintain workforce trust, and uphold regulatory obligations under Hong Kong employment law.
How FastLane Group Can Help
FastLane Group helps Hong Kong businesses adapt to the MPF offsetting abolition with expert payroll, accounting, and compliance support. From calculating SP/LSP under the new rules to applying for government subsidies, our team ensures your company stays compliant, financially prepared, and employee-focused. Contact us today to prepare for the 2025 reforms with confidence.
