Effective 1 May 2025, employers can no longer use accrued benefits from employers’ mandatory contributions to the Mandatory Provident Fund (MPF) to offset Long Service Payment (LSP) and Severance Payment (SP).

 

Key points on the abolition of MPF offsetting arrangement

  • The abolition of MPF offsetting arrangement has been in effect since 1 May 2025 (the transition date).
  • After this date, employers cannot use the accrued benefits from their mandatory MPF contributions (ERMC) to offset employees’ severance or long service payments.
  • However, accrued benefits derived from employers’ voluntary MPF contributions (ERVC) and gratuities based on years of service can still offset SP/LSP.
  • The abolition is not retrospective. For employees employed before the transition date, employers may continue using accrued benefits derived from his/her MPF contributions (both mandatory or voluntary, made before or after the transition date) to offset the pre-transition portion of SP/LSP.
  • The pre-transition portion of SP/LSP is calculated based on monthly wages immediately preceding the transition date and the years of service before the transition date.

 

Government Subsidy Scheme

  • The Government will launch a 25-year subsidy scheme of over $33 billion to help employers share the cost of the post-transition portion of SP/LSP.
  • Subsidies are based on specified share ratios relative to SP/LSP payable each year.
  • Employer’s total SP/LSP expenses are capped annually at $500,000, with different subsidy rules for cases under and above this threshold.
  • For cases where the accumulated expenses of SP/LSP fall within $500,000, a “capped amount” limits employer payment during the first nine years; any excess is subsidised by the Government.
  • For cases where the accumulated expenses of SP/LSP go beyond $500,000, no capped amount applies; subsidies are based on the share ratio alone. 

Year after abolition

Within $500,000 threshold (lower of %)

Beyond $500,000 threshold (%)

1-350% or $3,00050%
455% or $25,00055%
560% or $25,00060%
665% or $25,00065%
770% or $50,00070%
875% or $50,00075%
980% or $50,00080%
1080%85%
1180%90%
1285%95%
1385%100%
14-1990%100%
20-2595%100%

 

Implications for Employers

Keep wage records of employees

  • Employers are required to keep the wage and employment records of each employee covering the period of their employment during the preceding 12 months. For employees whose employment commenced before the “transition date”,  wage records covering the 12 months immediately preceding the “transition date” must be kept to facilitate the calculation of the pre-transition portion of SP/LSP payments where necessary.

 

Prepare for increased employers’ expenses

  • To assist employers adapt to this policy change, the Government will implement a 25-year subsidy scheme to share employers’ expenses for the post-transition portion of SP/LSP. Under the Subsidy Scheme for the Abolition of MPF Offsetting Arrangement, a “capped amount”  applies in the first nine years, with the “capped amount” as low as $3,000 during the first three years. In the long term, employers’ expenses related to the post-transition portion of SP/LSP may increase so early preparation is advisable. 

 

Accounting treatment for the offsetting arrangement

  • Under current Hong Kong accounting standards, employers must assess their potential LSP liabilities according to their circumstances. Employers should evaluate their obligations and expect a material impact on their financial statements.

 

Review HR policies and documentation

  • Employers should ensure employment terms and conditions in employment contract regarding MPF offsetting and termination provisions are legally compliant. A thorough review of employment contracts, employee handbooks and termination letters is necessary, with revision made to align with the new policy.

 

Dismissing employees before abolition incurs higher SP/LSP expenses

  • Employers who dismiss employees before the “transition date” and hire new employees will face higher SP/LSP expenses. Employers may continue using accrued benefits from their MPF contributions (mandatory or voluntary contributions) for existing employees throughout their entire employment period to offset the pre-transition portion of SP/LSP. Retaining existing employees allows accrued MPF benefits to grow, which can offset future pre-transition SP/LSP. Conversely, SP/LSP for new employees will accumulate afresh, capped at $390,000, and cannot be offset by employers’ mandatory MPF contributions.

 

How RSM can support your business during the transition

Application of Government Subsidy Scheme

  • The Abolition of MPF offsetting imposes significant financial and operational impacts on employers. Employers should ensure legal compliance during the transition by reviewing employment terms and termination policies. Fully understanding and utilising the government subsidy scheme can help employers reduce SP/LSP expenses.

 

Valuation of Long Service Payment and Severance Payment under Hong Kong Financial Reporting Standards

  • Given the complexity and sensitivity of Long Service Payment (LSP) liability assessments, external consultants are often engaged to ensure compliance with HKAS 19, maintain confidentiality of employee data and guarantee accurate LSP provision estimates.

If you require professional advice on termination cases, the abolition of MPF offsetting or LSP liability assessments, please feel free to reach out to our specialist:

Kate Chan
Kate Chan
Manager, Payroll and Accounting