MPF offset has long been a defining feature of Hong Kong’s employment landscape, allowing employers to use part of their Mandatory Provident Fund (MPF) contributions to reduce severance or long-service payment obligations. But with the abolition of offsetting taking full effect from 1 May 2025, businesses in 2026 must now understand a completely new compliance environment to protect both their cash flow and their people.
For employers, this reform is more than a policy shift; it changes how you plan for staff exits, budget for compensation, and manage your MPF responsibilities. Whether you’re updating contracts, recalculating termination costs, or modernising your internal processes with trusted payroll services, staying ahead of the new rules is key to keeping your business compliant and future-ready.
Apply the new MPF offset rules confidently
What was the MPF offsetting mechanism?
The MPF offsetting mechanism allowed employers to use their employer MPF contributions to reduce the amount of severance payment (SP) or long service payment (LSP) they needed to pay when an employee left the company. In simple terms, employers could tap into the MPF funds they had contributed to “offset” part of their termination payout obligations.
This meant that if an employee was entitled to SP or LSP, the employer could deduct the equivalent amount from their accumulated employer MPF contributions before paying the remaining balance in cash. While this helped lower business costs, it also reduced employees’ retirement savings, one of the main reasons the mechanism was eventually abolished.
What changed in Hong Kong MPF contributions on 1 May 2025?
From 1 May 2025, the MPF offsetting mechanism was officially abolished. This means employers can no longer use employer-mandatory MPF contributions to reduce severance payments (SPs) or long service payments (LSPs) for any service period after this transition date. All SP and LSP relating to post-transition employment must now be paid fully in cash.
However, the reform includes a transitional arrangement. For service periods before 1 May 2025, employers may still apply MPF offsetting based on the pre-transition rules. In practice, this splits an employee’s entitlement into two parts:
- Pre-transition portion – offsetting may still apply
- Post-transition portion – no offsetting is allowed
This approach protects employees’ future retirement savings while giving employers a phased adjustment period as they adapt to the new legal and financial requirements.
Employer’s Return in Hong Kong: A Comprehensive Guide
Why was the MPF offsetting abolished?
The main reason for abolishing MPF offsetting was to strengthen retirement protection in Hong Kong. Under the old system, many employees saw a significant portion of their MPF savings reduced when offsetting was applied to severance or long-service payments. This defeated the core purpose of MPF: to provide workers with a secure financial foundation for retirement.
By removing the ability to offset SP and LSP with employer-mandated contributions, the government aimed to preserve employees’ retirement funds and ensure termination payments are paid in full. The reform also aligns Hong Kong with global labour-protection standards and encourages businesses to plan more sustainably for staffing, retention, and compensation.
What the abolition of MPF offsetting means for employers
The abolition of MPF offsetting reshapes how businesses handle severance and long service payments. Employers must now plan, adjust internal processes, and update compliance practices to meet the new legal requirements. Key areas requiring attention include:
- Full cash payment obligations: SP and LSP for post–1 May 2025 services must be paid entirely in cash, without using employer-mandated MPF contributions.
- Clear service-period tracking: Employers must accurately separate pre-transition and post-transition service, as only pre-transition portions may still be offset.
- Updated contracts and policies: Employment agreements, HR manuals, and termination procedures should be revised to reflect the new rules.
- Strengthened internal record-keeping: Businesses need reliable systems to maintain detailed employment histories and MPF contribution information.
- Financial and cash-flow planning: Employers, especially SMEs, should reassess budgeting and prepare for potentially higher termination costs.
- Review of compensation structures: The change provides an opportunity to reevaluate employee benefits, gratuities, and retention strategies to ensure long-term sustainability and compliance.
How does the abolition of the MPF offset affect employees?
Employees should be aware, however, that the transitional arrangement still applies to service before 1 May 2025. This means part of their SP or LSP may still be offset using pre-transition employer contributions. To stay informed, employees are encouraged to:
- Review their MPF statements to understand their accumulated employer contributions.
- Check their length of service to see how much falls under the pre- and post-transition periods.
- Verify SP or LSP eligibility under the Employment Ordinance.
- Ask employers for a clear breakdown of how the final SP/LSP amount is calculated.
Overall, the reform strengthens retirement outcomes while offering greater clarity and fairness in the handling of termination payments.
How the transitional arrangement works in the abolishment of the MPF offsetting
The transitional arrangement ensures a gradual shift away from MPF offsetting rather than applying the new rules all at once. It divides an employee’s service into two periods, and each is treated differently when calculating severance or long service payments.
For clarity, the rules operate as follows:
- Pre-transition service (before 1 May 2025): Employers may still use employer-mandatory MPF contributions from this period to offset SP or LSP.
- Post-transition service (on or after 1 May 2025): Offsetting is no longer allowed. SP and LSP for this period must be paid fully in cash.
- Mixed service periods: When an employee spans both periods, SP or LSP is calculated separately for each portion. Only the pre-transition portion may be offset.
- Voluntary employer contributions and gratuities: Depending on scheme rules, they may still be used to offset payments in specific scenarios.
Summary table: How MPF offsetting applies
Service period | Can an employer apply MPF offsetting? | What funds can be used? | Payment requirement |
Before 1 May 2025 (pre-transition) | Yes | Employer mandatory MPF contributions (plus voluntary contributions/gratuities if allowed by scheme rules) | Remaining SP/LSP must be paid in cash after offset |
On or after 1 May 2025 (post-transition) | No | None — mandatory contributions cannot be used | Full SP/LSP must be paid entirely in cash |
Employees with mixed service | Partially | Offset applies only to the pre-transition portion | Post-transition portion must be paid in full without offset |
Practical MPF contribution and calculation checklist for employers in 2026
With the end of MPF offsetting, employers need to ensure their processes, documentation, and financial planning align with the updated rules. Here’s a practical checklist businesses can use to stay compliant and prepared:
- Review employment contracts: Update any clauses relating to SP, LSP, or MPF arrangements to reflect the abolition of offsetting for post–1 May 2025 service.
- Update HR and payroll policies: Ensure internal handbooks, workflow documents, and termination procedures accurately reflect current SP and LSP calculations.
- Strengthen employee record-keeping: Maintain clear records showing each employee’s service before and after 1 May 2025 to calculate transitional SP/LSP portions correctly.
- Clarify MPF scheme details with trustees: Confirm whether employer voluntary contributions or contractual gratuities in your scheme can still be used for offsetting and in what situations.
- Prepare for higher cash payouts: Since offsetting can no longer reduce post-transition SP/LSP, businesses should update their financial forecasts and set aside reserves where needed.
- Train HR and management teams: Ensure decision-makers understand the updated laws, transitional rules, and implications for terminations, redundancies, and budgeting.
- Review retention and benefits strategies: Consider whether employer voluntary contributions or alternative benefits can support long-term retention under the new framework.
This checklist helps organisations stay compliant, minimise risk, and adapt smoothly to the updated MPF environment. Let me know when you’re ready for the next section.
How Sleek helps you stay compliant with MPF contributions
Handling SP and LSP calculations after MPF offsetting ends can be complex, especially with transitional rules still in effect. Sleek’s updated payroll services are designed around the post-2025 requirements, ensuring accurate record-keeping, compliant calculations, and smooth payroll operations. With streamlined processes and expert guidance, Sleek helps your business apply the latest rules correctly so that you can move forward with clarity and confidence.
Stay compliant with the new MPF offset rules
FAQs about the abolition of the MPF offset
Does the abolition of MPF offsetting affect the way redundancy notices are issued?
No. The rules for providing notice or payment instead of notice remain unchanged. The reform only affects how severance and long service payments are calculated and funded.
Are employers required to inform employees in writing that offsetting no longer applies?
There is no legal requirement for a formal notice, but many employers choose to update contracts, staff handbooks, or onboarding materials to reflect the new rules for clarity and transparency.
Do fixed-term contract employees receive SP or LSP under the updated system?
Yes, but only if they meet the eligibility criteria under the Employment Ordinance. The abolition of offsetting does not change eligibility rules; it only changes how payments are funded.
Does the end of offsetting change how gratuity-based contracts are managed?
No. The employment contract still governs gratuities. However, employers should ensure gratuity terms do not conflict with the updated SP/LSP rules or imply offsetting where it no longer applies.
Can an employer choose to offer additional compensation in place of SP or LSP?
Yes. Employers may provide enhanced or ex gratia payments, but these cannot replace statutory SP or LSP obligations and cannot be funded by employer-mandatory MPF contributions.
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