Under the current system, employers in Hong Kong can offset severance payments (SP) and long service payments (LSP) against accrued benefits derived from their mandatory contributions under the Mandatory Provident Fund (MPF). To improve retirement protection for employees, the Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) Bill on 9 June 2022, abolishing this arrangement. The new rules will take effect from 1 May 2025 (“Transition Date”).
Existing Regime
The MPF Schemes Ordinance mandates that, unless exempted, employees and self-employed persons aged 18 to 64 join an MPF scheme. Both employers and employees are required to contribute 5% of the employee’s relevant income to the MPF, subject to minimum and maximum thresholds. For employees earning over HKD 30,000 per month, contributions are capped at HKD 1,500 each from the employer and the employee.
Employers must pay their portion of contributions from their own funds while deducting the employee’s contributions from their income.
Key Changes Post-Transition Date
After the Transition Date, employers will no longer be allowed to use their MPF contributions to offset SP or LSP for employment periods commencing from that date. However, the abolition does not apply retrospectively. Employers may continue using the offsetting arrangement for employment periods before the Transition Date, regardless of when contributions were made.
For SP or LSP accrued prior to the Transition Date, calculations will be based on the employee's wages and years of service before 1 May 2025. For example, an employee hired on 1 December 2022 will have SP or LSP offset only for the period from 1 December 2022 to 30 April 2025.
Considerations for Employers
Some employers might consider dismissing current employees and hiring new staff to avoid future SP and LSP liabilities. However, this approach may not lead to savings. The pre-Transition Date portion of SP or LSP is calculated based on wages and service years before the Transition Date, meaning the liabilities remain the same regardless of post-Transition employment length or wage increases. Dismissing an employee may actually result in higher costs, as accrued MPF benefits can no longer offset future SP or LSP under the new rules.
Employees Excluded from the Abolition
The abolition of the offsetting arrangement does not apply to workers excluded from the MPF system, such as domestic helpers and employees under 18 or over 65. For these groups, SP or LSP will continue to be calculated based on their last monthly wages or the average of the preceding 12 months, as per the Employment Ordinance.
Government Subsidy Scheme
To support employers during the transition, the Hong Kong Government will introduce a 25-year subsidy scheme worth approximately HKD 33.2 billion. This scheme is designed to assist with SP and LSP costs incurred after the Transition Date.
The subsidy is divided into two tiers:
For employers with annual SP and LSP expenses up to HKD 500,000, a maximum amount per case applies for the first nine years. The government will cover any amount exceeding this maximum.
For employers exceeding the HKD 500,000 threshold, SP and LSP payments will be shared according to a ratio, with the government covering the remaining amount.
Small and medium-sized businesses are expected to benefit significantly from this scheme, as their SP and LSP costs are generally within the first tier.
Future Measures – Designated Savings Accounts (DSA)
The government is preparing a new bill requiring employers to set up Designated Savings Accounts (DSA) to fund future SP and LSP liabilities. Under the DSA scheme, employers will allocate 1% of their employees’ monthly income until the DSA balance equals 15% of the annual income of all employees. These funds will be exclusively used for SP and LSP payments.
Employers should monitor developments regarding the DSA scheme to ensure compliance once the Abolition takes effect.
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