Compliance check: Hong Kong: upcoming abolition of MPF offsetting arrangement

From 1 May 2025 onwards, employers will no longer be able to use the accrued benefits of employers' mandatory contributions under the Mandatory Provident Fund (MPF) System to offset an employee's severance payment and long service payment.

Existing MPF Offsetting Arrangement

Under the MPF Schemes Ordinance, employers are currently entitled to offset an employee's severance payment or long service payment against the accrued benefits derived from employers' mandatory contributions under the MPF System.

In practice, employers first pay the severance payment or long service payment to the employee, and then request from the MPF trustee for a refund of the amount paid. This refund is withdrawn from the employee's MPF account, specifically from the benefits derived from the employer’s contributions.

Abolishment of MPF Offsetting Arrangement

From 1 May 2025 onwards, MPF offsetting arrangements will be abolished and employees will no longer be able to offset an employee's severance payment or long service payment against the accrued benefits derived from employers' mandatory contributions under the MPF System.

However, employers will still be able to offset severance payments and long service payments against accrued benefits from voluntary employer contributions under the MPF System. The abolition of MPF offsetting arrangement is also not applicable to employees who are currently not covered by the MPF System or other statutory retirement schemes (including foreign and local domestic helpers, and employees aged less than 18 or more than 65 or above).

Additionally, the abolishment of MPF offsetting arrangements will not have retrospective effect. Instead, transitional arrangements apply to employees who commenced employment with their employer prior to 1 May 2025 and whose employment terminates after 1 May 2025. For these employees, their severance payment or long service payment will be split into (i) a pre-transition portion in respect of the employment period prior to 1 May 2025; and (ii) a post-transition period portion in respect of the employment period from 1 May 2025 onwards:

• Pre-transition portion: Employers can continue to use the accrued benefits derived from their MPF contributions (irrespective of whether the contributions are made before, on or after the transition date, and irrespective of whether the contributions are mandatory or voluntary) to offset the pre-transition portion of an employee's severance payment or long service payment. The portion will be calculated on the basis of the monthly wages immediately preceding the transition date and the years of service before the transition date.
• Post-transition portion: Employers cannot use the accrued benefit derived from their MPF contributions to offset the post-transition portion of an employee's severance payment or long service payment. The portion will be calculated on the basis of the last monthly wages before termination of employment and the years of service starting from the transition date.

The government will be implementing a 25-year government subsidy scheme to assist employers with the transition. The subsidiary scheme will permit employers to apply for a disbursement from the government to share out their expenses resulting from a payment of the post-transition portion of an employee's severance payment or long service payment.

Under the subsidiary scheme, an employer's liability in relation to the post-transition portion of an employee's severance payment or long service payment will be capped at HKD 3,000 per employee during the first three years of the scheme (provided that the total severance payment or long service payment liability does not exceed HKD 500,000).

Key Takeaways

In light of the upcoming abolition of MPF offsetting arrangements, which will take effect from 1 May 2025 onwards, employers should review their template employment contracts, termination letters and policies, provide appropriate training to their HR employees as well as update their payroll systems, in order to ensure a smooth transition going forwards.