The Hong Kong government has confirmed that the use of employers’ mandatory contributions under the Mandatory Provident Fund (MPF) to offset severance payments (SP) and long service payments (LSP) upon termination of employment will be abolished from 1 May 2025.
Background
On 9 June 2022, the Hong Kong Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the “Bill”) to abolish the MPF offsetting arrangement. The Bill was enacted on 16 June 2022. The government published a commencement notice in November 2024 in the Gazette to appoint 1 May 2025 as the day that the legislation comes into effect (defined as the “transition date”).
MPF offsetting arrangement
Under the current MPF offsetting arrangement, employers are allowed to use accrued benefits from their mandatory contributions to their employees’ MPF schemes to offset any SP and LSP due to employees upon termination.
This arrangement was part of the deal made between the Hong Kong government and employers’ unions when the MPF scheme was introduced in the mid-1990s. Trade unions have criticized such arrangements that resulted in employees being dismissed without the right to any meaningful compensation because of the offsetting arrangement.
The legislation abolishes this offsetting right for employers from 1 May 2025. To mitigate the anticipated increase in employers’ financial costs, the Hong Kong government is introducing a 25-year subsidy scheme.
Eligibility for SP or LSP
Employees are eligible for SP if:
They have worked at least 24 months continuously.
They are dismissed due to redundancy, their fixed term employment contract is not renewed due to redundancy, or they are laid off (see the Labor Department’s guide here (opens a new window) for the meanings of redundancy and lay-off).
Employees are eligible for LSP if:
They have worked at least five years continuously.
They are dismissed not due to serious misconduct or redundancy, their fixed term employment contract is not renewed, or they die, resign due to ill health, or resign at age 65 or above.
An employee may only be entitled to either SP or LSP, but not both simultaneously.
Key details
Starting from 1 May 2025, employers will no longer be able to offset accrued benefits derived from their mandatory MPF contributions against SP or LSP calculated based on years of service starting from 1 May 2025. However, as the abolition has no retrospective effect, they may still use accrued benefits derived from their mandatory MPF contributions to offset SP or LSP calculated based on years of service before 1 May 2025 (more details below).
Employers will also be entitled to continue using accrued benefits derived from their voluntary contributions (those above the mandatory requirement) to offset SP or LSP before, on and after 1 May 2025.
“Grandfathering” arrangement
To reduce the risk of employers dismissing employees with many years of service or conducting large-scale dismissals before 1 May 2025 and so that the abolition does not apply retrospectively, a “grandfathering” arrangement will be implemented for the pre-transition portion of SP and LSP for employees who started employment before 1 May 2025.
The calculation of SP and LSP remains unchanged. The calculation is as follows: 2/3 x last full month’s wages or monthly average wages of the last 12 months (up to a limit of HKD 22,500) multiplied by the years of service. The maximum entitlement for SP or LSP is HKD 390,000.
For employees who started employment before 1 May 2025, their SP and LSP will be divided into a pre-transition portion for the employment period before 1 May 2025 and a post-transition portion for the employment period starting from 1 May 2025.
The pre-transition SP and LSP will be calculated based on the last full month’s wages (or monthly average wages of the last 12 months) preceding 1 May 2025 (instead of the actual date of termination of employment) and the years of service before 1 May 2025. The post-transition calculation will be based on the actual last full month’s wages (or monthly average wages of the last 12 months) preceding termination and the years of service starting from 1 May 2025. If the sum of the pre- and post-transition portions of SP or LSP exceeds the cap of HKD 390,000, the excess amount shall be deducted from the post-transition portion.
In addition, employers can continue to use the accrued benefits from their mandatory MPF contributions to offset the pre-transition portion (but not the post-transition portion) of SP and LSP. This applies regardless of whether the contributions are made before, on or after 1 May 2025.
ORSO plans
The legislation abolishes offsetting arrangements not only for employers’ mandatory MPF contributions but also under MPF-exempted employer-funded Occupational Retirement Scheme Ordinance (ORSO) plans. Since ORSO plans do not distinguish between mandatory and voluntary contributions, the legislation establishes a formula to determine the amount, equal to an employer’s mandatory MPF contributions, that cannot be used to offset SP or LSP (a detailed explanation of the formula can be found on the Labor Department’s Frequently Asked Questions website here (opens a new window)).
Government support measures
Given the financial burden that employers will bear as a result of abolishing the offsetting arrangement, the Hong Kong government is introducing a 25-year subsidy scheme, for a total of HKD 33.2 billion, to assist employers, specifically micro, small and medium-sized businesses, for employment terminations between 1 May 2025 and 30 April 2050 (both dates inclusive).
Under the subsidy scheme, share ratios will determine the shared amount of SP or LSP to be borne by the employer (the “Employer Shared Amount”) and the amount that will be reimbursed by the government.
For the first HKD 500,000 of an employer’s total annual expenses of SP and LSP, the Employer Shared Amount is determined by a share ratio or a capped amount, whichever is the lower, for the first nine years from 1 May 2025. The government will reimburse the remaining amount. The capped amount has been set at HKD 3,000 for the first three years from 1 May 2025, but will progressively increase so that the subsidy level progressively decreases. After the initial nine years, only a share ratio will apply with no capped amount.
For an employer’s expenses of SP and LSP beyond the first HKD 500,000, SP and LSP payments will be shared by the employer and the government based on a share ratio with no capped amount, with the employer share ratio to progressively increase over time. Details on the share ratios and capped amounts are available on the Labor Department’s website here (opens a new window).
A bill was expected to be introduced for a Designated Savings Accounts (DSA) scheme which would have required employers to make mandatory contributions to meet their SP and LSP future liabilities after the abolition of the offsetting arrangement. The government subsequently announced in 2023 that it would not proceed with the proposal.
Employer action: ACT
From 1 May 2025, employers will need to ensure that if SP or LSP is payable to an employee after termination:
For employees who started employment before 1 May 2025, offsetting with accrued benefits from employers’ mandatory MPF contributions is only applied to the pre-transition portion of SP and LSP, and not the post-transition portion. Accrued benefits from employers’ voluntary contributions can be used to offset pre- and post-transition portions of SP or LSP.
For employees who started employment on or after 1 May 2025, SP and LSP should not be offset with any accrued benefits from employers’ mandatory MPF contributions. Accrued benefits from employers’ voluntary contributions can be used to offset pre- and post-transition portions of SP or LSP.
Employers should review their arrangements to prepare for compliance and determine whether and how they wish to use any accrued benefits from MPF contributions, mandatory (where permitted for the pre-transition portion of SP and LSP) or voluntary, to pay out SP and LSP. Employers, if they are eligible, should also apply for government subsidy of expenses on the post-transition portion of SP and LSP within three months of making payment of SP or LSP to the relevant employee. More details on the application, including on eligibility, may be found on the Labor Department’s website here (opens a new window).
Employers will also need to review the accounting treatment of LSP with their auditors to determine whether the elimination of the offsetting mechanism will have a material impact on their accounts that may require actuarial valuation of the LSP liability. Long-term costs for employers are likely to increase, although they may be alleviated to some extent by the government subsidy.
Further Information
Platform on Abolition of MPF Offsetting Arrangement | Labor Department (opens a new window)
