Since the 'transition date' of 1 May 2025, employers can no longer use the accrued benefit of their mandatory MPF contributions to offset an employee's severance payment (SP) or long service payment (LSP) for service accrued from that date onward. Employers may still use accrued benefits from voluntary MPF contributions to offset SP/LSP, for service both before and after the transition date.
The underlying SP/LSP formula is unchanged: for a monthly-paid employee, it is two-thirds of the employee's last full month's wages for every year of service, calculated on a monthly wage capped at HK$22,500, with total SP/LSP capped at HK$390,000. Employees may instead elect to use their average wages over the last 12 months for this calculation.
The abolition is not retroactive. For employees whose service spans the transition date, SP/LSP must now be calculated in two separate parts — a pre-transition part and a post-transition part — with different offsetting rules applied to each.
Our perspective
Most of the compliance risk here is arithmetic, not policy interpretation — the formula and caps are unchanged, but every termination calculation for a long-serving employee now needs two dates, two service-year counts, and two offsetting checks instead of one. Getting the split wrong is an easy, avoidable payroll error with a direct cash cost.
What HR should check now
For every employee whose service crosses 1 May 2025, confirm the exact pre- and post-transition service length before calculating anything, since a miscounted split changes both the cash amount due and the offsetting eligibility. Track accrued mandatory versus voluntary MPF contributions separately in payroll records, since only voluntary contributions can offset the post-transition part. Budget for post-transition SP/LSP as a cash cost rather than assuming MPF will cover it, and file for the government subsidy scheme within the three-month window whenever a payment qualifies.
How the two-part calculation actually works
The pre-transition part covers service up to 30 April 2025 and is calculated using the standard formula on the employee's wage at that point; the employer can still fully offset this portion using accrued MPF benefits from both mandatory and voluntary contributions, regardless of when those contributions were actually made. The post-transition part covers service from 1 May 2025 onward, calculated the same way but based on wages nearer termination; the employer can no longer offset this portion using mandatory contributions, only voluntary ones.
An employee earning a steady HK$22,500 a month works 2 years before the transition date and 3 years after, for 5 years total service. The pre-transition part is (22,500 x 2/3) x 2 = HK$30,000, and the post-transition part is (22,500 x 2/3) x 3 = HK$45,000, for a combined SP/LSP of HK$75,000. The employer can still offset the HK$30,000 pre-transition part using accrued mandatory MPF contributions, but the HK$45,000 post-transition part must be paid in cash unless the employer has voluntary contributions accrued to offset it — a direct, quantifiable increase in cash severance cost compared to the old regime.
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