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Legal Update: MPF Offsetting against SP/LSP Abolished from 1 May 2025 - What Employers in Hong Kong Need to Know
- Chloe Lau
- 7 days ago
- 7 min read
Updated: 6 days ago
From 1 May 2025 onwards, a major shift in employment law took place in Hong Kong, namely, the abolition of the Mandatory Provident Fund (MPF) offsetting arrangement against severance payment (SP)/long service payment (LSP). This change marks the end of an era and introduces new and unprecedented responsibilities for employers in handling SP/LSP. While the reform enhances retirement protection for employees, it also brings about heightened cost implications for businesses. This article aims to explain in simple terms the said legislative reform and what has changed, how the new law works in practice, and how the government subsidy scheme functions to support employers during this transition period.
Author: Chloe Lau, Associate Solicitor
Hong Kong’s MPF system being its compulsory retirement savings scheme for both employees and self-employed adults.
Severance payment (SP) being a compensation payable to an employee who has been employed under a continuous contract for not less than 24 months and is dismissed due to redundancy or laid off.
Long service payment (LSP) being compensation for employees who have served at least 5 years under a continuous contract and are dismissed (for reasons other than serious misconduct or redundancy), retire at age 65 or above, resign due to ill health, or pass away.
PART I: OLD POSITION
The MPF Offsetting Arrangement pre-1 May 2025
Under the MPF scheme, employees and employers in Hong Kong each contribute 5% of the employee’s income to the employee’s MPF account on a monthly basis, which serves as accumulative retirement savings for the employees. Before the reform was introduced, employers were legally allowed to “offset” SP/LSP against the accrued MPF contributions made by the employer to the employee’s account over the period of employment. This meant that at termination where SP/LSP applies, the employer could reduce payment payable upfront to the employee and hence its liability by offsetting the same against the employee’s own retirement savings.
The abolition and the rationale behind
The primary objective of the offsetting mechanism was to ease financial pressure of the employers. However, over time, concerns grew and criticisms were widely received, as this set-off arrangement in effect reduces significantly the termination entitlement of the employees, which was viewed as unfair and inconsistent with the very purpose of the MPF scheme, which being to accumulate retirement savings of the employees and to serve as a social security system for post-retirement benefits. Long-serving employees who served the company for many years would find their termination entitlement greatly reduced at the termination of their employment, particularly since the MPF contribution attributable to the employer and applicable on the set-off against SP/LSP is significant.
After years of discussion and effort, the Hong Kong government passed legislation in 2022 to abolish this offsetting mechanism. The change took legal effect from 1 May 2025 onwards.
PART II: NEW POSITION
What Happens After 1 May 2025?
Starting from 1 May 2025, employers will no longer be allowed to use MPF contributions to offset SP/LSP for any period of service after the effective date of the new law. The calculation of SP/LSP will now be split into two parts:
Pre-transition Service (Before 1 May 2025): For years served before the transition, employers can still use accrued MPF contributions to offset the relevant portion of SP or LSP.
Post-transition Service (On or after 1 May 2025): For years worked after the transition, employers must pay SP/ LSP upfront to the employees, with no offsetting allowed from MPF contributions.
The total statutory SP/LSP payable remains capped at HK$390,000, and the calculation formula (two-third of monthly wage capped at HK$15,000, multiplied by years of service) also still stands.
Distinction between mandatory and voluntary employers’ contribution to MPF
It is worth noting the offsetting restriction applies only to mandatory employers’ contribution, i.e. 5% of the employee’s monthly wages capped at HK$1,500 per month.
On the other hand, employers may still use voluntary MPF contributions, i.e. the contribution made in addition to what is required by law, to offset SP/LSP even after the reform.
PART III: SUBSIDY SCHEME
Subsidy Scheme following the legislative reform
To ease financial burden for employers, particularly for small and medium enterprises (SMEs), a government subsidy scheme has been introduced by the Hong Kong Government, to be administered by the Labour Department. This scheme will run for 25 years starting from the transition date of 1 May 2025, with descending levels of financial support over time.
Annual Threshold & Employer Share
Each employer receives an annual subsidy threshold of HK$500,000 in total for SP/LSP payments. During each year, within the HK$500,000 threshold, the employer’s share of the post-transition SP/LSP payable to each employee is capped at HK$3,000. Beyond this threshold, the same 50% share applies, but the per-employee cap no longer applies (calculation examples to follow).
Importantly, the HK$500,000 threshold is not a cap on the total SP/LSP payable by an employer or the maximum subsidy to be received. Rather, it serves as an indicator to determine how much of those payments are eligible for more favourable subsidy terms.
Example: 2025 subsidy rates
In the first three years after the change (2025 to 2027):
The employer is required to pay 50% of the post-transition portion of SP/LSP.
The government pays the other 50%.
A cap of HK$3,000 per employee applies to the employer’s share of SP/LSP within the HK$500,000 threshold.
For payouts beyond the HK$500,000 threshold in the same year, the same 50-50 percentage applies, but the per-employee cap is no longer available.
Example: What about 2029 subsidy rates?
After the first three years, the employer’s share will slowly increase. In other words, the level of subsidy available will become less:
In 2029, for example, the employer will need to pay 55% of SP/LSP (within the HK$500,000 threshold), with a higher cap of HK$25,000 per employee.
The government covers the remaining 45%.
For payments beyond HK$500,000 in the same year, the employer must still pay 55%, but there is no cap per employee.
This gradual increase continues until employers eventually bear the full cost of SP/LSP with no subsidy from the government by 2050.
Case Study: Termination in December 2025
Suppose an employee was employed from 1 January 2018 to 31 December 2025 (8 full years of service). Upon termination, they are entitled to a statutory LSP. Assume their monthly wages average HK$15,000 (maximum allowed under the statutory formula).
LSP is calculated as:
(2/3 × HK$15,000) × 8 years = HK$10,000 × 8 = HK$80,000
This amount is split pre- and post- transition phases as follows:
1 Jan 2018 to 30 Apr 2025 (Pre-transition, ~7.33 years): HK$10,000 × 7.33 = HK$73,300
1 May to 31 Dec 2025 (Post-transition , ~0.67 year): HK$10,000 × 0.67 = HK$6,700
The portion representing pre-transition entitlement (HK$73,300) may still be offset against the employer’s accrued MPF contributions relating to the service period on or before 30 April 2025, if available.
The portion representing post-transition entitlement (HK$6,700) must be paid in full, but the employer is only required to bear HK$3,000 (the cap of the subsidy within the HK$500,000 threshold), and the remaining HK$3,700 will be covered by the subsidy scheme, as long as the total annual SP/LSP payouts by the employer remain within the HK$500,000 threshold.
On the other hand, if the aggregate SP/LSP payable by the particular employer has already exceeded the HK$500,000 threshold in a given year, the cap of HK$3,000 per employee no longer applies, and the employer will have to bear 50% of HK$6,700, which being HK$3,350.
Note to employers who wish to apply for subsidy
Employers who seek to benefit from the subsidy scheme should submit an application to the Labour Department for reimbursement after making SP/LSP payments to the employees, which involves submission of an application form, details of the terminated employee, proof of payment, and calculation of the statutory SP/LSP amount etc.
Supporting documents, including employment contracts, termination notices, payroll records, and MPF statements may also be required. Note that applications must be submitted within a specified time frame following the termination, and employers are highly encouraged to keep clear and organised records of the employment and termination to avoid undue delay in obtaining reimbursement.
PART IV: PRACTICAL IMPLICATIONS
How employers should prepare
Employers should begin adjusting their human resources and finance systems to prepare for the transition. Suggested steps include:
review employee records to distinguish pre- and post-transition service dates;
plan for increased cash flow/liquidity to pay SP/LSP directly;
study and understand the subsidy process, including the application process, the level of subsidy available, how best they can utilise the scheme;
Update employment contracts and internal policies to reflect and accommodate the change;
consult legal or accounting professionals for guidance on individual cases.
Employers may consider conducting appropriate internal training to ensure the relevant teams’ knowledge on the split pre- and post- transition SP/LSP calculation and the rules on offsetting and subsidy eligibility etc. It is also critical to maintain detailed employment and MPF records and manage them in a manner which clearly distinguishes between pre- and post-transition entitlements.
For larger employers with multiple terminations in a single year, strategic advanced planning with termination dates may help with optimising benefits under the subsidy scheme, especially with the HK$500,000 annual threshold in mind.
In a nutshell: subsidy will ease burden allowing employers time to adjust
The abolition of the MPF offsetting mechanism is considered a significant step forward for the retirement protection in Hong Kong. While the change may have increased employers’ financial obligations, the government has provided a detailed, long-term, and well-planned subsidy scheme to ease the impact, particularly in the first decade of the implementation of the new regime.
Forward planning and careful record-keeping are key. Employers are strongly encouraged to educate themselves on the legislative reform and the potential benefits to be obtained from the subsidy scheme, in order to better manage staffing decisions, financial forecast, compliance matters, and overall – to navigate businesses effectively in this new era.
Disclaimer: Whilst every effort has been made to ensure the accuracy of this article it is general in nature and does not constitute legal advice of any kind. You should seek your own personal legal advice before taking legal action. We accept no liability whatsoever for loss arising out of the use or misuse of this article.
For specific advice about your situation, please contact:
Associate
+852 2388 3899
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