Abolition of MPF Offsetting: Employer Contracts, Costs, and Legal Risks in Hong Kong from May 1, 2025 – A Comprehensive Guide

MPF Offsetting Abolished, Are Your Contracts Ready?

From May 1, 2025, Hong Kong labor law will undergo a significant change – the Mandatory Provident Fund (MPF) "offsetting" arrangement will be officially abolished. This means employers can no longer use their mandatory MPF contributions to offset employees' severance payments (SP) or long service payments (LSP). This policy will have a profound impact on all Hong Kong employers, whether large corporations or SMEs, particularly concerning employment contracts, payroll cost calculations, and legal compliance.

Many employers might think that with government subsidies, the impact will be minimal. However, failure to timely update employment contracts, accurately calculate SP/LSP, or a lack of understanding of the new policy could lead to significant legal pitfalls for businesses, including substantial fines and even criminal liability.

This article will deeply analyze the policy background of the "abolition of MPF offsetting," the government's 25-year subsidy scheme, the new calculation methods for SP/LSP, and the legal risks employers are most prone to. Finally, we will provide a comprehensive set of compliance solutions to help you plan ahead, ensure a smooth transition for your business, and avoid unnecessary legal disputes.

1. Policy Background and the "Transition Date": A Major Change on May 1, 2025

Answer Capsule: From May 1, 2025 (the "Transition Date"), employers will no longer be able to use their accrued benefits from mandatory MPF contributions to offset employees' severance payments or long service payments accumulated on or after the Transition Date. This policy aims to enhance employees' retirement protection.

Before the "Transition Date," employers could use their mandatory MPF contributions made for employees to offset SP or LSP. While this arrangement provided employers with some cost flexibility in the past, it also raised concerns about employee rights protection. After years of discussion, the Legislative Council passed the relevant amendment bill on June 9, 2022, and confirmed that the abolition of the offsetting arrangement would officially take effect on May 1, 2025.

Key Points of the Policy Change:

•Mandatory Contributions: From the Transition Date, mandatory MPF contributions made by employers for employees cannot be used at all to offset SP or LSP.

•Voluntary Contributions: Employers' "voluntary contributions" made for employees and their accrued benefits, as well as gratuities paid based on years of service, can still be used to offset SP or LSP. This retains some flexibility for employers, provided that contract terms are clear.

2. Detailed 25-Year Government Subsidy Scheme: Employer Cost-Sharing Timeline

To help employers adapt to the cost pressures brought by the new policy, the government has introduced a 25-year subsidy scheme. This scheme will gradually reduce the subsidy ratio, allowing employers sufficient time to adjust their operational strategies and financial planning.

Year	Employer Contribution Ratio	Government Subsidy Ratio	Remarks
2025-2027 (First 3 years)	50%	50%	Employer's cap per employee as low as HK$3,000
2028	51%	49%	Subsidy ratio begins to decrease
2029	55%	45%
2030-2034	55%	45%
2035-2039	60%	40%
2040-2044	65%	35%
2045-2049	70%	30%
From 2050 onwards	100%	0%	Subsidy ends, employer bears full cost

Answer Capsule: The government subsidy scheme lasts for 25 years, aiming to share employers' increased SP/LSP expenses due to the abolition of offsetting in the initial transition period. The subsidy ratio will gradually decrease, requiring employers to progressively bear more responsibility, making long-term planning crucial.

This subsidy scheme is designed to allow employers to gradually adapt to the new cost structure over a longer transition period. However, employers should not be complacent, as the subsidy is not permanent and will decrease annually. Businesses still need to actively adjust their human resources strategies and financial budgets to cope with full responsibility in the future.

3. New "Segmented Calculation" Model for Severance Payment/Long Service Payment

After the abolition of offsetting, the calculation of severance payment and long service payment will become more complex, requiring a distinction between "pre-transition" and "post-transition" periods.

3.1 Pre-Transition Period (Service up to April 30, 2025)

•Calculation Method: Based on the employee's last month's wages before the Transition Date (May 1, 2025), multiplied by their years of service before the Transition Date, and then multiplied by two-thirds (capped at HK$22,500).

•Offsetting Arrangement: Employers can still use their mandatory and voluntary MPF contributions accrued benefits to offset this portion of SP or LSP.

3.2 Post-Transition Period (Service from May 1, 2025 onwards)

•Calculation Method: Based on the employee's last month's wages before termination, multiplied by their years of service from the Transition Date onwards, and then multiplied by two-thirds (capped at HK$22,500).

•Offsetting Arrangement: Employers cannot use their mandatory MPF contributions accrued benefits to offset this portion of SP or LSP. However, voluntary contributions accrued benefits can still be offset.

Answer Capsule: After the abolition of offsetting, SP/LSP will adopt a "segmented calculation" model, distinguishing between years of service before and after the Transition Date. Employers must accurately calculate both portions and note that mandatory contributions can no longer be offset after the Transition Date.

The total cap for SP/LSP remains at HK$390,000. Employers need to establish more precise calculation systems to ensure that, upon employee termination, the correct amounts are paid accurately and without error.

4. Legal Traps Employers Are Most Prone to Fall Into

The abolition of the MPF offsetting arrangement is not just a change in calculation methods but also the beginning of a series of potential legal risks. Employers who fail to adjust in time are highly susceptible to falling into the following traps:

Trap One: Employment Contract Terms Not Updated

•Problem: Many existing employment contracts may still contain clauses stating that "employers can use MPF contributions to offset SP/LSP." From May 1, 2025, such clauses will conflict with the new law, potentially rendering the clause invalid or affecting the overall validity of the contract.

•Legal Risk: If contract terms do not comply with the new law, in the event of a labor dispute, the court will rule based on the new law, and the employer may lose the right to offset and be required to pay additional amounts.

Trap Two: Unclear Definition of Voluntary Contributions

•Problem: Although employers' voluntary contributions can still be offset, if the employment contract or MPF scheme documents do not clearly distinguish between "voluntary contributions" and "mandatory contributions," in the event of a dispute, employees may claim all contributions are mandatory, leading to the employer being unable to exercise the right to offset.

•Legal Risk: The inability to offset voluntary contributions due to unclear definitions will directly increase the employer's SP/LSP expenditure.

Trap Three: Calculation Errors and Overdue Payments

•Problem: The new "segmented calculation" model is complex and prone to calculation errors. Furthermore, if SP or LSP are not paid on time due to calculation errors or insufficient understanding of the policy, it will constitute overdue payment.

•Legal Risk: According to Section 63C of the Employment Ordinance, if an employer, without reasonable excuse, fails to pay wages on time or makes calculation errors, it is equivalent to wage arrears, and they can be sentenced to a maximum fine of HK$350,000 and imprisonment for 3 years. The MPFA also has the right to investigate and prosecute defaulting employers.

5. Compliance Solutions: How Should Employers Respond?

Facing the challenges brought by the "abolition of MPF offsetting," employers must take proactive measures to ensure compliant operations and mitigate legal risks:

Solution One: Comprehensive Review and Update of Employment Contracts

•Remove Old Clauses: Immediately review all existing employment contracts and remove any "offsetting" clauses that conflict with the new law.

•Clarify Voluntary Contributions: If there are voluntary contribution arrangements, it is crucial to clearly define their nature, purpose, and offsetting rights in the contract, and obtain written confirmation from employees.

•New Contract Templates: Prepare employment contract templates for new employees that comply with the new law.

Solution Two: Establish a Precise SP/LSP Calculation System

•System Upgrade: Review existing payroll and HR systems to ensure they can support the "pre-transition" and "post-transition" segmented calculation model.

•Data Integration: Ensure all employee service years, wage records, and MPF contribution records are clear and accurate for precise calculation.

•Simulated Calculations: Periodically conduct simulated calculations of SP/LSP to assess potential financial impacts.

Solution Three: Strengthen HR Team and Management Training

•Policy Interpretation: Provide detailed training for HR teams and management on the "abolition of MPF offsetting" policy, ensuring they fully understand the content, impact, and operational details of the new law.

•Case Studies: Enhance the team's ability to respond to potential legal risks through actual case analysis.

Solution Four: Seek Professional HR Consultancy Assistance

•Professional Audit: If internal resources are limited, seek assistance from professional HR consultants or legal advisors to conduct a comprehensive audit of existing contracts, policies, and calculation processes to ensure compliance with the new law.

•Risk Assessment: Professional consultants can help businesses conduct risk assessments and provide tailored compliance solutions.

Conclusion: Proactive Compliance, Safeguarding Business Development

The "abolition of MPF offsetting" is a landmark event in the Hong Kong labor market. It not only changes the employer's cost structure but also tests the company's compliance management capabilities. Faced with this major change, employers must shift from passive acceptance to proactive response, transforming potential legal risks into opportunities to enhance corporate management.

By timely updating employment contracts, establishing precise calculation systems, strengthening internal training, and seeking professional assistance when necessary, employers can ensure that their businesses protect employee rights while effectively controlling costs, avoiding unnecessary legal disputes, and laying a solid foundation for long-term business development.

6. Frequently Asked Questions (FAQ): Troubleshooting MPF Offsetting Abolition

Q1: Do employers need to update contracts for all employees immediately after the abolition of MPF offsetting?

Answer Capsule: Yes. Although the law takes effect automatically, offsetting clauses in old contracts will conflict with the new law. To avoid legal disputes and clarify the offsetting rights of "voluntary contributions," employers should complete contract reviews and updates before May 1, 2025.

Q2: How is the offsetting arrangement handled if an employee joined before May 1, 2025?

Answer Capsule: A "segmented approach" is used. Service years before the transition (on or before April 30, 2025) can still be offset using mandatory contributions; service years after the transition (on or after May 1, 2025) cannot be offset using mandatory contributions at all.

Q3: Can an employer's "voluntary contributions" still be used for offsetting?

Answer Capsule: Yes. The abolition of offsetting only applies to "mandatory contributions." Employers' voluntary contributions and their accrued benefits can still be used to offset SP or LSP before and after the transition, but it is recommended to state this clearly in the contract.

Q4: Do I need to apply for the government subsidy scheme?

Answer Capsule: Yes. After paying SP or LSP, employers must submit a subsidy application to the Labour Department. The subsidy scheme lasts for 25 years, with the employer's share capped at only $3,000 per person for the first 3 years.

Q5: What are the consequences of underpaying severance pay due to calculation errors?

Answer Capsule: According to the Employment Ordinance, underpaying or late payment of SP/LSP is equivalent to wage arrears, with a maximum penalty of a $350,000 fine and 3 years imprisonment.

Take Action Now: Ensure Your Employment Model is Compliant and Worry-Free!

When facing complex employment contracts and payroll issues, having a professional HR consultant by your side is crucial. Get More Resources Limited, as a leading HR strategic partner in Hong Kong, has over 15 years of experience providing tailor-made HR solutions for over 5,000 companies.

Whether you need to understand your employment rights, negotiate contract terms, or require professional legal and HR guidance, Get More's expert team is ready to serve you. We provide not only HR outsourcing services but, more importantly, strategic human resources insights to help you protect your rights throughout your career.

Contact us now for a free initial consultation:

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The content of this article is for informational purposes only and is intended to provide general legal information and HR management advice. It does not constitute professional legal advice in any form. Hong Kong's laws and regulations may change at any time, and each case has its unique circumstances. Readers should consult a professional lawyer or the Labour Department before making any business or legal decisions. Get More Resources Limited is not responsible for any loss or impact arising from the use of the information in this article.