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MPF Offsetting in Hong Kong: What Actually Changed on 1 May 2025

2026-09-10

For decades, a Hong Kong employer facing a severance or long service payment obligation had a release valve: the accrued benefits derived from their own mandatory MPF contributions to that employee's account could be used to offset the bill. That release valve is gone. Since 1 May 2025, employers can no longer use mandatory MPF contributions to offset severance payments (SP) or long service payments (LSP) for periods of service falling after that date.1 This isn't a proposal, a consultation, or a "coming soon" — it's been the law for well over a year, and if your business still assumes the old offsetting rule applies in full, you're operating on outdated information that could cost you at the next termination.

This piece lays out what actually changed, how the transition-date split works in practice, what government support exists, and what a Hong Kong employer — or the accounting and company secretarial firm advising one — needs to have in place today.

What the offsetting mechanism used to do

Under the Employment Ordinance, an employee dismissed by reason of redundancy (after at least 24 months of continuous service) is entitled to a statutory severance payment. An employee who resigns, retires, or is dismissed after at least five years of continuous service — for reasons other than summary dismissal for misconduct — is entitled to a long service payment instead.1 Both are calculated as two-thirds of the employee's last full month's wages (capped at a wage ceiling) for each year of service, subject to an overall cap.

Before 1 May 2025, employers were allowed to use the accrued benefits derived from their own mandatory MPF contributions — the 5% employer contribution, not the employee's own 5% — to offset the SP/LSP bill, dollar for dollar.1 In effect, employers had been pre-funding part of their own severance liability through MPF the whole time, and got to claw that funding back the moment they had to pay it out. Unions and labour groups had argued for years that this hollowed out the point of MPF as retirement savings, since a large share of accrued benefits never survived to retirement — they got redirected into offsetting SP/LSP instead. The Mandatory Provident Fund Schemes Authority (MPFA) itself has published data over the years showing billions of dollars in mandatory contributions withdrawn annually for offsetting purposes rather than retained as retirement savings.

The legislative path to abolition

The abolition didn't happen overnight. The Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 on 9 June 2022, and it was enacted as an Ordinance shortly after.2 The government then built in nearly three years of lead time before the actual "transition date" — 1 May 2025 — to give employers, payroll providers, and MPF trustees time to prepare, and to let the government stand up a subsidy scheme (more on that below) before the financial impact actually landed.2 That lead time is now behind us. As of today, the transition date isn't a future milestone to plan around — it's a fixed point in the past that every SP/LSP calculation has to reference.

What changed, precisely

The core change is narrower than a lot of secondary coverage makes it sound. Employers did not lose the ability to offset SP/LSP entirely, and the change is not retroactive.1 What actually happened:

  • For service before 1 May 2025: employers can still use accrued benefits derived from mandatory MPF contributions to offset the SP/LSP attributable to that pre-transition period.
  • For service on or after 1 May 2025: mandatory MPF contributions can no longer be used to offset SP/LSP for that period at all.
  • Voluntary contributions: whether made before or after the transition date, MPF accrued benefits derived from an employer's voluntary contributions — and contractual gratuities based on length of service — remain available to offset SP/LSP throughout.1

This produces a "grandfathering" arrangement rather than a clean break. Any employee whose service spans the transition date has their SP/LSP calculated as two separate portions, using a segmented formula, then added together.

How the pre/post-transition split actually works

For an employee who started before 1 May 2025 and is terminated after it, the calculation splits into:

  1. Pre-transition portion — years of service up to 30 April 2025, using the employee's monthly wages immediately before the transition date, calculated under the same two-thirds-per-year formula as before. This portion remains offsettable against mandatory MPF contributions.
  2. Post-transition portion — years of service from 1 May 2025 onward, using the employee's final month's wages at termination. This portion cannot be offset against mandatory contributions at all.

Both portions are still subject to the statutory wage ceiling of HK$22,500 a month and the overall SP/LSP cap of HK$390,000 per employee, which were not changed by the abolition — those caps predate the reform and continue to apply to the combined pre- and post-transition total.1 In practice, this means every HR function or payroll provider handling a termination now needs two data points for any employee hired before May 2025: their wage as of 30 April 2025, and their wage at actual termination, plus a service-year count split at the transition date. Getting the split wrong either underpays a departing employee (a labour dispute risk) or overpays them relative to what the law actually requires.

The government subsidy scheme

Because the post-transition portion can't be offset at all, the government introduced the Subsidy Scheme for Abolition of MPF Offsetting Arrangement — commonly promoted in Chinese as 援「沖」易 — to cushion the cost for employers, particularly smaller ones, over a 25-year period from the transition date.3 The scheme is projected to cost the government more than HK$33.6 billion in total.4 It works by sharing a portion of an employer's post-transition SP/LSP expenses each year:

  • In the scheme's early years, the government covers a lower percentage but applies a low cap per employee (as little as HK$3,000 in the first three years) on top of an annual employer expense threshold of HK$500,000.
  • The subsidy ratio rises progressively over the 25-year period — reaching considerably higher percentages, and in later years removing the per-employee cap for amounts above the threshold — as the government's projected exposure decreases and employers' accrued MPF-derived offsetting capacity for pre-transition service naturally runs down.3

Employers apply through the dedicated TransitionEase portal (offsettingsubsidy.gov.hk) after actually paying the SP/LSP in question — the subsidy is a reimbursement mechanism, not an advance. Given the tiered structure and the interaction with the $500,000 threshold, most small and medium employers benefit from at least confirming their eligible amount with a payroll or company secretarial provider rather than estimating it themselves, since a miscalculated claim can delay reimbursement.

Accounting treatment employers can't ignore

The abolition isn't just an HR and payroll problem — it's a financial reporting one. The Hong Kong Institute of Certified Public Accountants issued Financial Reporting Alert 44 in February 2023, flagging that the change in employers' ability to offset LSP obligations against MPF-derived assets has a direct impact on how that liability should be recognised and measured under HKFRS.5 Employers that previously treated their MPF mandatory contributions as effectively pre-funding (and therefore netting against) their LSP liability now need to reassess that liability without assuming future offsetting for post-transition service. For companies with a workforce that includes employees approaching the five-year LSP threshold, this can mean a real, disclosable increase in provisions — not just a payroll footnote.

A second, related change: who even qualifies for SP/LSP

A separate but relevant development landed even more recently. The Employment (Amendment) Ordinance 2025 came into effect on 18 January 2026, lowering the weekly working-hours threshold for the Employment Ordinance's "continuous contract" test from 18 hours to 17 hours, with an additional averaging rule allowing a week under 17 hours to still count if that week plus the preceding three weeks together total at least 68 hours.6 This is a separate reform from the offsetting abolition, but it's directly relevant here: continuous contract status is the gateway to SP/LSP entitlement in the first place, and a lower threshold means more part-time and irregular-hours employees now qualify for protections — including SP and LSP — that some previously fell just short of. Employers with part-time or roster-based staff, which is common in retail and food and beverage operations, should re-check who now clears the bar, rather than assuming the pre-2026 headcount of "continuous contract" employees still holds.

Who's most exposed

The abolition matters most to labour-intensive, higher-turnover sectors where SP/LSP liabilities were historically a meaningful line item precisely because mandatory MPF offsetting kept the net cost low. That includes retail and food-service operators with high staff turnover, construction and engineering firms with project-based crews who accrue years of service across multiple contracts with the same employer, and logistics operations with large frontline headcounts. If your business sits in one of those categories, the segmented calculation above isn't an abstract compliance footnote — it changes the actual cash cost of a redundancy round. Browsing this directory's own industry pages alongside the construction and engineering and logistics listings gives a sense of how many registered Hong Kong companies sit in exactly these higher-exposure categories.

What employers should actually do now

Given the abolition has already been in force for well over a year, the practical checklist isn't "prepare for a future change" — it's "confirm you're actually compliant today":

  • Confirm payroll or your HR system is calculating SP/LSP using the segmented pre/post-transition formula, not the old single-formula approach.
  • Capture and retain each affected employee's wage record as of 30 April 2025 — you'll need it indefinitely for as long as that employee remains employed and could eventually be terminated.
  • Reassess LSP provisions in your financial statements in line with HKICPA guidance, rather than assuming historical offsetting still nets down the liability.
  • If you've paid out post-transition SP/LSP since May 2025 and haven't yet claimed against the subsidy scheme, check your eligibility on the TransitionEase portal — the reimbursement doesn't happen automatically.
  • Re-check which part-time and irregular-hours staff now meet the "continuous contract" test under the 17-hour threshold that took effect in January 2026.

Where professional advisers fit in

None of this is especially complicated in isolation, but it compounds: a segmented SP/LSP formula, an evolving 25-year subsidy schedule, a financial reporting reassessment, and a separate eligibility rule change all landed within about nine months of each other. That's exactly the kind of overlapping regulatory change that accounting and company secretarial firms — the same firms this directory indexes under accounting and company secretarial services and professional and consulting services — exist to keep track of on a client's behalf. If you're running payroll in-house without a dedicated HR function, this is a reasonable moment to have an outside adviser sanity-check at least one full SP/LSP calculation against the current rules, rather than assuming your existing spreadsheet template was updated correctly back in 2025.

Citations

  1. Mandatory Provident Fund Schemes Authority — Long Service and Severance Payments, accessed 2026-09-10

  2. Labour Department — Abolition of MPF Offsetting Arrangement, accessed 2026-09-10

  3. "EasyCal" Calculating Tool for the Abolition of MPF Offsetting Arrangement — Subsidy Scheme for Abolition of MPF Offsetting Arrangement, accessed 2026-09-10

  4. LCQ3: Abolition of offsetting arrangement of Mandatory Provident Fund — Press Releases, Government of the Hong Kong SAR, accessed 2026-09-10

  5. HKICPA Financial Reporting Alert 44 — Abolition of MPF-LSP Offsetting Mechanism, accessed 2026-09-10

  6. Labour Department — Revise the "Continuous Contract" Requirement under the Employment Ordinance, accessed 2026-09-10