Global News Brief

The Legislative Council has made a few key changes to tighten administration of the Mandatory Provident Fund (MPF) scheme, including closing a loophole related to housing allowances that had existed since the MPF’s inception in 2000. The changes, which will take effect on November 1, 2008, include significant penalties for employers who do not follow the new rules.
 
Key Details 

The MPF Schemes amendment addressed two issues of particular importance to employers, including provisions that:

• Include housing allowance and other housing benefits in the definition of “relevant income” when calculating contributions. This is to prevent employers from avoiding the mandatory MPF contributions by labelling a large part of the employees' pay as housing benefits. The regulatory authority, the Mandatory Provident Funds Authority, may institute civil proceedings against employers that violate the requirement.  It is also able to fine employers for outstanding contributions and to impose surcharges.  Defaulting employers can also be subject to prosecution and, on being found guilty, can face a fine of up to HKD 100,000 or even imprisonment.

• Remove the 30-day settlement period for MPF contributions put in place seven years ago to allow employers to adjust to the new scheme. All employers are now required to contribute by the contribution day that is set at 10 days after the end of the contribution period.  Failure to comply with this time frame will be an offence which will result in a surcharge and possibly subject to a financial penalty of HKD 5,000 or 10 percent of the contributions payable (whichever is greater). It could also result in criminal proceedings, with a maximum penalty of six months’ imprisonment and a fine of HKD 100,000 for a first offence.

Given the changes, employers should review their administrative systems and policies in relation to pay and holiday allowances and the calculation of MPF contributions in order to avoid any breach of the new regulations. They should further communicate with their employees to advise them of potential change to the MPF payments that may result from this review and implement any modifications to terms and conditions necessary. The trustees should also be advised of any resulting changes.

Background

Under the MPF, the employer and the employee are each required to make a mandatory contribution of 5 percent of the employee’s “relevant income” up to HKD 20,000. (For the employee this requirement is waived if his/her relevant income is below HKD 5,000.)

When determining the level of “relevant income” for the purposes of MPF, mandatory elements of remuneration taken into account were: wages, salary, leave pay, fee, commission, bonus, gratuity, perquisites or allowances expressed in monetary terms.  Housing allowances or other housing benefits were specifically excluded from this calculation, as were severance payments or long service payments under the Hong Kong Employment Ordinance.  Some employers had made it a practice to classify some extra income as a housing allowance to avoid MPF contributions on that income.