MPF Offsetting Mechanisms

Previous blogs introduced highlights of MPF you need to pay attention to, when making your contributions. MPF Offsetting Mechanism might be something you have heard about before. Although employees can be enthusiast about their job and be very fond of their company, there is still a possibility that you will have a chance of leaving the company. At this point, MPF Offsetting Mechanism walks onto the stage. It could alleviates the financial pressure an employer have to pay relevant compensations.

The government has drafted to cancel the original offsetting policy, requiring employer to save-up and be prepared for the large amount of Long Service Payment and Severance Payment. The plan is estimated to be enforced, the earliest possible, in 2025. No matter you are an employer or employee, the two policies - be it new or old, are both systems so related to us that we must understand thoroughly.

• What is MPF Offsetting Scheme?

Under the current Employment Ordinance, employers are allowed to offset their Severance Payment or Long Service Payment, against the MPF derived balance from the employers' mandatory and voluntary contributions, when they dismiss their employees.

If the amount of MPF derived balance from the employer's contributions is enough to cover the LSP/SP payable, employers could utilize the MPF derived balance to offset the payment, without having to pay for the any of the compensations. However, if the amount derived from the employer's contributions is not enough to cover the LSP/SP payable, employers could still utilise the MPF derived balance to offset the payment. Additionally, employers would be obligated to recover any shortfall, after the offset.

• What is my MPF derived balance?

According to the Mandatory Provident Fund Schemes Ordinance, employers would have to make mandatory contributions monthly, paying a 5% of their employees' relevant income or a maximum of HK$1,500, to their employees' MPF accounts monthly.

MPF derived balance, thus, refers to the aggregated amount of employer's contributions and the investment return, in the employee's MPF account. 

• What are LSP and SP?

Employee who has been employed for not less than 24 months under a continuous contract, and satisfying the following conditions upon dismissal, will be eligible for SP.

1. The employee is dismissed by the reason of redundancy
2. The employment contract of a fixed term expires without being renewed by reason of redundancy
3. The employee is laid off

Employees having been employed for not less than 5 years under continues contract are eligible for LSP, when satisfying the following conditions:

1. The employee is dismissed but: he is not summarily dismissed due to his serious misconduct; or his dismissal is not by the reason of redundancy
2. The employment contract of a fixed term expires without being renewed
3. The employee dies
4. The employee resigns on ground of ill health
5. The employee, aging 65 or above, resigns

• What are the differences between the new and old offsetting policies?

Under the old and current MPF Offsetting Scheme, employers could utilize their MPF derived balance to cover the LSP/SP payable. After the enforcement of the new scheme in 2025, employers would no longer be able to use their MPF derived balance to offset against the LSP/SP payable, but part of the payable would be subsidized by the government.

For example, the Severance Payment (SP) for Chris is HKD10,000. Under the old Offsetting Scheme, employers could use their HKD10,000 MPF derived balance to offset against the payable. However, under the new policy, employers would have to pay HKD5,000 for their employees' SP, and the other half of the payable (HKD5,000) would be subsidized by the government. The MPF derived balance of the employer would be kept in the MPF account, and employees would only be able to retrieve the grand MPF amount when reached the retirement age of 65.

Under the new policy, employers would have to pay for extra LSP/SP. Therefore, the government has required the employers to set up mandatory saving accounts as "fund pool", according to the employees' monthly income, contributing 1% of the income amount to the "fund pool".

• As an employee, how would I be affected?

Under the current old scheme, most of the employees when being dismissed, would receive SP from the employers. Such SP would be coming from the employer's MPF contributions. On the contrary, under the new policy, employees' compensation would not be offset against MPF, and such MPF derived balance could still be collected in the future.

Employees or self-employed persons could withdraw their MPF benefits in cheque under any of the following conditions:

1. Reaching the retirement age at 65
2. Early retirement at age 60
3. Death
4. Permanent departure from Hong Kong
5. Total incapacity
6. Terminal illness
7. having no intention to be employed or be self-employed in the upcoming future, with a small balance account of less than HKD5,000, without having other balance in other plans, while the last mandatory contribution made is more than 12 months ago

OneStart Business Centre could offer employers and employees with one-line professional MPF consultation services. If any readers have any questions about the new and old systems of MPF Offsetting Scheme, please feel free to call our sales specialists for enquiries!

Interested in OneStart Business Centre' MPF consulting services? Phone in to our hotline 3575 6888 or WhatsApp our helpful consultants!