MPF offsetting is a mechanism that allows employers to use part of their MPF contributions to “offset” the amount of severance payment (SP) or long service payment (LSP) they are required to pay employees under the Employment Ordinance. Offsetting helps reduce the financial burden on employers but, at the same time, lowers the benefits employees receive when their employment ends.
Key Takeaways
Definition of MPF Offsetting
Employers could previously use mandatory MPF contributions to reduce severance payment (SP) and long service payment (LSP) obligations, but this mechanism is being phased out.
Why Offsetting is Abolished
The government ended offsetting because it weakened retirement protection, reducing employees’ savings at termination. From 1 May 2025, SP/LSP and MPF savings will be fully retained by employees.
Post-Transition Rules
For employees hired on or after 1 May 2025, employers’ MPF contributions can no longer offset SP/LSP. Employees keep both their full SP/LSP and MPF benefits.
Pre-Transition Employment
For employees hired before 1 May 2025, SP/LSP will be split into pre- and post-transition portions. The pre-transition part can still be offset, while the post-transition part cannot.
Impact on Employers and Employees
Employees gain stronger financial security, while employers face higher liabilities. Businesses must plan payroll and compliance strategies to manage the additional obligations.
Why Is MPF Offsetting Abolished?
The Hong Kong government decided to abolish offsetting because it undermines the fundamental purpose of MPF to build retirement savings for employees.
When offsetting is applied, employees often receive reduced SP or LSP, which weakens their financial security at the time of termination. To address this, the abolition will ensure that employees can keep both their MPF savings and their statutory SP/LSP.
The abolition takes effect on 1 May 2025, known as the “transition date”. From this date onwards:
- Accrued benefits derived from employers’ mandatory MPF contributions (ERMC) can no longer offset employees’ SP/LSP for service years after the transition date. However, ERMC can still be used to offset SP/LSP for service years before the transition date.
- Accrued benefits derived from employers’ voluntary MPF contributions (ERVC) and gratuities based on employees’ years of service can still be used to offset SP/LSP, regardless of whether the service years fall before or after the transition date.
Key Changes After 1 May 2025 (Transition Date)
The abolition of MPF offsetting takes effect from 1 May 2025, known as the transition date. After this point, how severance payment (SP) and long service payment (LSP) are handled will depend on when an employee was hired and whether they are under the MPF or an Occupational Retirement Scheme (ORS).
1. For Employees Hired On or After 1 May 2025
- Employers’ mandatory MPF contributions (ERMC) cannot be used to offset SP/LSP.
- Employees retain both their full SP/LSP and their full ERMC contributions.
Example Table:
| Item | Amount (HK$) | Offset Allowed? | Employee Retains (HK$) |
| Severance / LSP | 60,000 | No | 60,000 |
| ERMC | 50,000 | No | 50,000 |
| Total Benefits | 110,000 |
2. For Employees Hired Before 1 May 2025
SP/LSP is divided into two parts:
- Pre-transition portion (before 1 May 2025): Can still be offset by ERMC.
- Post-transition portion (on or after 1 May 2025): Cannot be offset by ERMC.
Example Table:
| Item | Amount (HK$) | Offset Allowed? | Employee Retains (HK$) |
| Pre-transition SP/LSP | 40,000 | Yes | 40,000 |
| Post-transition SP/LSP | 30,000 | No | 30,000 |
| ERMC (remaining after offset) | 20,000 | N/A | 20,000 |
| Total Benefits | 90,000 |
Important Notes:
- The maximum SP/LSP remains capped at HK$390,000.
- If the combined pre- and post-transition SP/LSP exceed HK$390,000, the excess is deducted from the post-transition portion.
- The calculation cap per year of service remains ⅔ of HK$22,500 (i.e. HK$15,000).
3. Employees Under Occupational Retirement Schemes (ORS)
The abolition also applies to employees covered by certain ORS, including:
- Exempted ORS under the Mandatory Provident Fund Schemes Ordinance (MPFSO)
- The Grant School Provident Fund and Subsidized Schools Provident Fund
- Overseas ORS exempted from the MPF system
Employer contributions are divided into two categories:
| Contribution Type | Similar to MPF | Offset Rule After 1 May 2025 |
| Carved-out benefits | Mandatory contributions (ERMC) | Cannot offset post-transition SP/LSP but can offset pre-transition SP/LSP |
| Remaining benefits | Voluntary contributions (ERVC) | Can offset SP/LSP for both pre- and post-transition service years |
Exempted Employees
While the abolition of MPF offsetting applies to most employees in Hong Kong, there are certain categories of workers who are not covered by the MPF system. For these employees, the offsetting arrangement is not applicable, and their entitlements continue to be calculated under the Employment Ordinance.
Who are Exempted Employees?
The following groups are not subject to MPF contributions and therefore remain unaffected by the abolition of offsetting:
- Domestic helpers
- Employees under the age of 18 at the time of termination
- Employees aged 65 or above at the commencement of employment
How Their SP/LSP is Calculated
Since employers are not required to make mandatory MPF contributions for exempted employees, there are no MPF funds to offset. Their severance payment (SP) and long service payment (LSP) will continue to be calculated under the existing provisions of the Employment Ordinance, based on:
- The last full month’s wages before termination, or
- The average wages over the 12 months immediately preceding termination (if this method provides a fairer calculation).
Key Takeaway for Employers and Employees
- Exempted employees retain their full SP/LSP entitlements under the Employment Ordinance.
- The MPF offsetting abolition has no impact on their calculation method.
Employers should still ensure accurate wage records are kept to facilitate correct SP/LSP calculations.
How SP/LSP is Calculated
Under the Employment Ordinance, both Severance Payment (SP) and Long Service Payment (LSP) are calculated using one of the following methods:
- Last full month’s wages immediately preceding the termination of employment, OR
- Average monthly wages over the past 12 months immediately preceding the termination (whichever is more favourable for the employee).
Key Calculation Rules:
- Maximum SP/LSP entitlement: HK$390,000
- Annual cap: ⅔ of HK$22,500 = HK$15,000 per year of service
Example: f an employee has 10 years of service and qualifies for LSP, the maximum entitlement would be:
10 years × HK$15,000 = HK$150,000 (subject to the HK$390,000 cap).
What This Means for Employers and Employees
The abolition of MPF offsetting, which takes effect from 1 May 2025, represents a significant change in how benefits are preserved. For employees, the reform provides stronger retirement protection because their SP/LSP and MPF savings will be kept separate. This means they will retain the full amount of both, without having their severance or long service payments reduced by their employer’s mandatory MPF contributions.
For employers, however, the new rules bring higher financial responsibilities. Previously, mandatory contributions could be used to offset part of the SP/LSP liability, but this will no longer apply to service years after the transition date. Employers will therefore need to prepare in advance, setting aside adequate resources to cover future obligations. Careful planning around financial reserves, workforce management, and compliance will become increasingly important.
Conclusion
The abolition of MPF offsetting is a significant milestone in strengthening employee retirement protection in Hong Kong. From 1 May 2025 onwards, employees will retain both their severance payment (SP) or long service payment (LSP) and their MPF benefits, ensuring that their retirement savings are preserved independently of their termination payments.
For employers, this change brings increased financial responsibilities, as the ability to use mandatory MPF contributions to offset SP/LSP liabilities will no longer apply for service years after the transition date. Businesses need to plan ahead to manage these obligations effectively. With careful preparation, companies can comply with the new regulations while continuing to safeguard employee welfare.
How FastLane Group Can Help
At FastLane Group, we help Hong Kong businesses prepare for the MPF offsetting abolition with expert payroll, MPF, and compliance support. From SP/LSP calculations to HR advisory, our team ensures a smooth transition and full compliance. Contact us today to safeguard your business and employees
