Abolition of MPF Offsetting in Hong Kong Effective 1 May 2025

Hong Kong MPF Offsetting Abolition

The hong kong mpf offsetting abolition took effect on 1 May 2025. It rewrites how employers calculate severance payment and long service payment under the Employment Ordinance (Cap. 57). Before that date, an employer could deduct accrued benefits from mandatory MPF contributions when paying these statutory entitlements. From 1 May 2025, that offsetting mechanism is gone for service accrued on or after that date. Transitional rules preserve limited offsetting for pre-2025 service.

Pre-2025 Offsetting Mechanism

An employer who had made mandatory MPF contributions could use the accrued benefits to reduce the severance payment or long service payment owed to a departing employee. The employer’s total liability was effectively shared with the MPF scheme. The Mandatory Provident Fund Schemes Authority (MPFA) administered the rules. The Labour Department provided guidance on how the offsetting interacted with the Employment Ordinance.

Voluntary contributions made by the employer were never caught by the restriction and remain available for offsetting both before and after the abolition.

Hong Kong MPF Offsetting Abolished 2025

From 1 May 2025, employers may no longer offset severance payment or long service payment using accrued benefits from mandatory MPF contributions for service performed on or after that date. The change applies to all employees, regardless of when they started employment. The abolition is set out in amendments to the Employment Ordinance and the Mandatory Provident Fund Schemes Ordinance. The MPFA has published operational guidance for employers and trustees.

The employer must now pay the full statutory severance or long service payment calculated on post-30 April 2025 service, without any deduction for MPF accrued benefits. Cash liability rises. The impact is sharpest for long-serving employees.

Hong Kong Severance Payment MPF Offsetting

Severance payment is payable under sections 31B to 31E of the Employment Ordinance when an employee with at least 24 months’ continuous service is dismissed by reason of redundancy or is laid off. The calculation uses the employee’s final monthly wages and years of service, subject to a cap of HK$390,000 per employee.

Before the abolition, an employer could deduct the accrued benefits from mandatory MPF contributions from the severance payment. From 1 May 2025, that deduction is no longer available for service on or after that date. For employees whose employment began before 1 May 2025, the accrued benefits from mandatory contributions may still offset the portion of severance payment attributable to service before that date. The abolition does not apply to pre-2025 service.

Hong Kong Long Service Payment Offsetting

Long service payment is payable under sections 35B to 35F of the Employment Ordinance when an employee with at least five years’ continuous service is dismissed for reasons other than redundancy, or resigns on grounds of ill health or age. The calculation mirrors that of severance payment. The same offsetting rules applied before the abolition.

From 1 May 2025, mandatory MPF accrued benefits may offset only the portion of long service payment calculated on service before 1 May 2025. The portion attributable to service on or after that date must be paid in full by the employer.

Transitional Rules for Pre-2025 Service

The abolition has no retrospective effect. For an employee who started work before 1 May 2025, the employer may still use accrued benefits from mandatory MPF contributions to offset the severance or long service payment attributable to the period of service before that date. The employer must split the total payment into two parts: one for pre-2025 service and one for post-30 April 2025 service.

The MPFA has issued guidance on calculating the pre-2025 portion. Determine the number of years of service before 1 May 2025 and apply the statutory formula to that period. Apply the accrued benefits from mandatory contributions only to that pre-2025 portion. Any remaining accrued benefits cannot be used to offset the post-2025 portion.

Government Subsidy Scheme

The Government operates a subsidy scheme to share employers’ expenses on severance and long service payment for service on or after 1 May 2025. The scheme reimburses employers a portion of the statutory payment they make, subject to caps and conditions. The Labour Department administers the scheme. Employers must apply within the prescribed timeframe after making the payment.

The subsidy is calculated as a percentage of the statutory payment for post-2025 service, with a maximum reimbursement per employee. The scheme eases the transition for employers who now bear the full cost of these payments without the offsetting mechanism.

Treatment of Voluntary Contributions and Gratuities

Accrued benefits from voluntary MPF contributions made by the employer may still be used to offset severance or long service payment, both for pre-2025 and post-2025 service. Voluntary contributions are those made above the mandatory 5% of relevant income. They are not subject to the abolition.

Gratuities based on length of service, contractual termination payments or ex-gratia payments, may still be used to offset statutory entitlements. The Employment Ordinance allows an employer to deduct any gratuity paid on termination from the severance or long service payment, provided the gratuity is calculated on the same basis as the statutory payment. This rule remains unchanged.

Employer Compliance Steps

Review payroll systems and employment contracts to ensure correct calculation of severance and long service payment from 1 May 2025. The key steps are:

1. Identify employees whose employment began before 1 May 2025 and calculate the pre-2025 service period.
2. Determine the accrued benefits from mandatory MPF contributions that may offset the pre-2025 portion.
3. Calculate the post-2025 portion separately, without any offsetting.
4. Apply for the government subsidy where eligible.
5. Maintain records of the calculation, including the split between pre-2025 and post-2025 service, for at least six years after termination.

The Labour Department and MPFA have published detailed guidance on the transitional rules. Consult these sources when calculating payments for employees with service spanning the abolition date.