Social Security and Insurance Schemes in Malaysia

The Malaysian social security framework operates through a coordinated system of mandatory contributions by employers and employees, creating a financial safety net that extends protection across employment cycles. Unlike some developed economies where social security is primarily tax-funded, Malaysia employs a contributory model where both employers and employees invest directly in these protection schemes.

Contributing Advisor

Quinn Lu

Senior Associate, International Business Advisory

What is Malaysia's social security system?

Malaysia's social security system comprises a series of statutory, mandatory schemes administered by government agencies that collect contributions and distribute benefits according to specific eligibility criteria. The system is premised on the principle that all workers—Malaysian citizens, permanent residents, and qualifying foreign workers—deserve fundamental protection against contingencies including workplace injuries, income loss due to unemployment, and insufficient retirement savings.

The system operates on three core pillars:

• Retirement Security: Long-term savings for post-employment income
• Insurance Protection: Coverage against workplace injuries, disability, and death
• Income Replacement: Temporary financial support during involuntary unemployment

Unlike voluntary insurance, participation in Malaysia's primary social security schemes is mandatory for all employers and employees meeting certain criteria, ensuring universal coverage rather than leaving protection dependent on individual choice or employer discretibility.

Why does it matter?

The social security system matters profoundly for several reasons:

• For Employees: Contributions made during working years create a substantial retirement fund. For example, an employee earning RM 5,000 monthly from age 25 to 55 accumulates approximately RM 1.2–1.5 million in combined EPF (Employees Provident Fund) contributions, providing financial independence post-retirement without relying solely on family support or government assistance.
• For Employers: Compliance demonstrates corporate responsibility, reduces legal liability, attracts quality talent, and creates a stable workforce less prone to financial stress-related absences or performance issues.
• For Society: Universal coverage reduces pressure on government welfare systems, maintains consumption during economic downturns (as retrenched workers access EIS benefits), and promotes economic stability by preventing destitution among aging populations.

The COVID-19 pandemic crystallized these benefits—employees with robust EPF balances weathered lockdowns more effectively, while EIS (Employment Insurance System) emerged as a critical safety net for displaced workers.

Malaysia's social security architecture involves multiple specialized agencies, each with distinct mandates:

Who needs to contribute

Employees Provident Fund (EPF) — Retirement savings

The EPF (Kumpulan Wang Simpanan Pekerja / KWSP) is Malaysia's primary retirement security mechanism, operating as a mandatory savings scheme rather than a pay-as-you-go pension system. Established under the Employees Provident Fund Act 1991, EPF collects contributions from over 14 million members and manages approximately RM 987 billion in assets (as of 2024).

• Core purpose: Accumulate retirement funds for workers, enabling financial independence post-employment and reducing government pension obligations. Unlike traditional pensions that depend on employer stability, EPF balances remain portable—employees retain accumulated savings regardless of job changes or employer insolvency.
• Structure: EPF operates as a defined contribution scheme where final retirement benefits depend directly on cumulative contributions and investment returns. Higher earners and longer tenured employees accumulate substantially larger balances.
• Investment philosophy: EPF invests member contributions across diverse asset classes including equity markets, fixed income, property, and international assets, aiming for long-term growth exceeding inflation while managing risk.

Contribution rates

EPF contributions vary significantly based on employee age, citizenship, salary level, and registration date:

Effective October 1, 2025, Malaysia has extended mandatory EPF contributions to all foreign workers, with both employers and non-permanent-resident foreign employees contributing 2 percent each of monthly wages. This landmark change provides expatriates retirement security in Malaysia and represents a shift toward universal coverage principles.

The most significant employer cost differential occurs at RM 5,000—employers contribute 13 percent for salaries below this level but only 12 percent above it. This structure incentivizes salary benchmarking around RM 5,000 and reflects policy intent to concentrate contribution burden more heavily on lower-wage employers.

Contribution thresholds for Malaysians vs Expats

 Tax reliefs and incentives

Social Security Organization (SOCSO / PERKESO) — Injury and disability protection

SOCSO (Pertubuhan Keselamatan Sosial Employees' Social Security Act 1969) provides comprehensive insurance protection against workplace-related contingencies, covering all private sector employees and foreign workers holding valid permits.

Dual scheme structure:

• Employment Injury Scheme: Covers accidents occurring during employment or while traveling on employment duties
• Invalidity Scheme: Provides 24-hour coverage against invalidity or death from any cause, not just work-related incidents

This comprehensive coverage means employees are protected whether injuries occur on factory floors, during commutes, or even at home—a distinction from many developed economies where non-occupational disabilities receive lesser protection.

The Employment Injury Scheme covers workers against accidents or occupational diseases directly arising from employment or while traveling on employment duties.

The Invalidity Scheme provides 24-hour coverage (not limited to work hours) against permanent invalidity or death from any cause. While the Employment Injury Scheme requires direct work-connection, the Invalidity Scheme covers all causes—medical conditions, accidents, illness—occurring at any time, providing comprehensive social protection akin to disability insurance.

Registration requirements:

• Employers must register new employees within 30 days of hiring.
• Complete Forms SOCSO 1 (employer) and SOCSO 2 (employee) via ASSIST Portal or manual submission.
• Registration applies regardless of employment duration or employee status.

SOCSO rates remain relatively flat across wage brackets, unlike EPF's RM5,000 threshold differentiation. This flat-rate structure means contribution burden does not increase substantially for higher-wage employees. Effective October 2025, foreign workers also contribute to SOCSO, with identical employer/employee rates applied.

Contributions due by the 15th of the following month. Late payments incur 6 percent annual interest calculated daily, with minimum charges of RM5 per month.

Employment Insurance System (EIS) — Unemployment coverage

EIS addresses a critical gap in Malaysia's social security architecture by providing temporary income replacement during involuntary unemployment and supporting workforce retraining.

Distinct from EPF (retirement) and SOCSO (injury protection), EIS specifically addresses economic shocks—retrenchment, company closures, and restructuring—that characterize modern labor markets. Unlike unemployment insurance in some countries, EIS includes integrated career counseling and training programs, positioning it as a transition support system rather than merely financial assistance.

EIS operates as insurance against income loss, not charity. All employees and employers contribute collectively to a pooled fund providing benefits to those experiencing qualifying unemployment, similar to insurance principles where many contribute so few can benefit when needed.

Who contributes?

Mandatory Contributors:

• Employees: Aged 18–60 (contributions cease at age 60).
• Employers: All employers with one or more employee.
• Self-Employed: Optional participation available through specialized registration.

Exclusions:

• Employees age 60+ (exempt from contributions and benefits).
• Employees who resigned voluntarily (generally ineligible).
• Employees dismissed for serious misconduct.
• Foreign workers initially (though policies evolving toward inclusion).
• Civil servants (covered under separate schemes).

Employees must be registered with SOCSO to be eligible for EIS; no separate registration required if already registered for SOCSO coverage.

EIS represents the lowest mandatory contribution rate in Malaysia's social security system, reflecting its recent introduction and conservative funding approach. Contributions capped at RM 6,000 monthly wages, meaning high-earners pay fixed contributions rather than percentage-based amounts increasing with salary.

Human Resource Development Fund (HRDF) — Upskilling contributions

HRDF (Pembangunan Sumber Manusia Berhad / HRD Corp), established 1992 and rebranded as HRD Corporation in 2021, operates as a training subsidy mechanism rather than insurance or pension.

Other national insurance and social protection schemes

Kumpulan Wang Persaraan (KWAP) manages retirement benefits for Malaysia's approximately 1.6 million civil servants, offering a defined-benefit pension system distinct from private sector EPF contributions.

Contribution structure:

• Government contribution: 17.5 percent of pensionable salary.
• Employee contribution: 5 percent of annual budgeted emoluments.
• Asymmetrical structure reflects government's defined-benefit obligation.

Pension calculation:

Gratuity: 7.5 percent × service length (months) × final salary

Monthly Pension: 1/600 × service length (months) × final salary (maximum 60% of final salary for 30 years service)

• Mandatory Retirement Age: 60 years old.
• Optional Retirement: Minimum age 40 with 10 years’ service.

Government transitioning new civil service hires to EPF-style defined contributions rather than traditional pensions, addressing sustainability concerns. Current estimates show government pension obligations ballooning from RM 30.5 billion (2024) to RM 120 billion (2040) without reform.

Takaful schemes (Islamic Insurance)

Takaful represents Islamic insurance operating on pooled mutual-contribution principles rather than risk-transfer models. Rather than customers transferring risk to insurance companies, takaful participants collectively guarantee each other.

Key distinctions:

Available products:

• Medical takaful (hospitalization, outpatient coverage).
• Life or family takaful (death benefit, income protection).
• General takaful (property, vehicle, liability).

Despite Islamic basis, takaful is open to all Malaysians regardless of religion, with non-Muslim participation increasing annually as recognition spreads that takaful represents alternative insurance model rather than exclusively religious product.

Employer obligations under Malaysian Law

Deadlines for monthly contributions

Penalties for late or non-payment

An employer delaying multiple contribution types simultaneously faces compound penalties—for example, delaying EPF, SOCSO, and HRDF simultaneously on RM 100,000 payroll incurs RM 5,000+ monthly penalties, rapidly becoming untenable.

Records to maintain:

• Monthly salary, deductions, net pay per employee for a minimum of 3 years.
• Proof of payment (bank receipts, portal confirmation).
• Identity proofs, employment contracts, attendance records.
• ITR (Withholding Tax) evidence, Form E submissions.
• Accident reports, medical documentation for benefit claims.

Employers increasingly adopt cloud-based payroll systems (e.g., Swingvy, ADP, Paychex) maintaining complete audit trails and enabling quick compliance verification. During government labor inspections or tax audits, employers should immediately produce contribution proof (portal payment confirmations, bank statements) and wage records supporting contribution calculations. Inability to produce timely records often results in presumption of non-compliance and escalated penalties.

Are expatriates required to contribute to EPF/SOCSO?

Foreign workers holding valid work permits or employment passes have been required to contribute to SOCSO continuously. Employers cannot opt-out of SOCSO registration for eligible foreign workers regardless of expected tenure.

Effective October 1, 2025, Malaysia has extended mandatory EPF contributions to all foreign workers for the first time. Both employers and foreign employees now contribute 2 percent each of monthly wages.

Optional vs mandatory participation

Unlike some countries where foreign workers can waive statutory social security, Malaysia has moved firmly toward mandatory coverage approach, recognizing that social security protects all residents and benefits economy-wide stability.

Work permit categories and eligibility

Ineligible Categories:

• Domestic workers/household employees (excluded for cultural/administrative reasons).
• Visitors or tourists (non-work purposes).
• Diplomats/consular staff (covered under separate agreements).
• Military or armed forces exchange personnel.

Employers must verify valid work authorization before registering foreign employees with SOCSO/EPF. Hiring workers without proper permits while making contributions exposes employers to two problems: (1) contribution responsibility without legal right to employ, and (2) potential immigration violations.

Tax benefits and financial advantages

Tax-Deductible Contributions (EPF, SOCSO, Insurance Premiums)

For Employers:

• EPF Contributions: 100 percent tax-deductible; employer contribution (12–13%) fully deductible as business expense.
• SOCSO Contributions: 100 percent tax-deductible; employer contribution (1.75%) fully deductible as employment expense.
• EIS Contributions: 100 percent tax-deductible; employer contribution (0.2%) fully deductible.
• Group Medical Insurance Premiums: 100 percent tax-deductible; employer-paid premiums for employee health insurance fully deductible, not counted as taxable benefit to employees.
• Group Life Insurance: Employer-paid premiums 100 percent deductible; death benefit payable to employee dependents tax-exempt.
• HRDF Levy: 100 percent tax-deductible; often recovered partially through training grants, creating effective net cost reduction.
• Tax Planning Impact: For a RM1 million payroll, total deductible employer contributions approximate RM150,000 (15%), reducing taxable income proportionally. At 24 percent corporate tax rate, this generates RM36,000 annual tax savings—funds employers can reinvest in operations or additional benefits.

For Employees:

• EPF Contributions Relief: Up to RM4,000 annual income tax relief; employee's 11 percent EPF contribution generates tax deduction reducing taxable income.
• Private Retirement Scheme (PRS) Relief: Additional RM3,000 relief for self-employed or employees maximizing retirement savings.
• Group Medical Insurance: Employer-paid premiums are tax-exempt to employees (not counted as taxable income); only personally-funded health insurance ineligible for deduction.
• Combined Employee Relief Example (Annual salary RM60,000):
  • EPF contribution (11%): RM6,600 with RM4,000 relief.
  • Taxable income: RM60,000 - RM4,000 = RM56,000.
  • Employer-paid medical insurance: RM1,200 (not taxable).
  • Effective tax benefit: RM960 (RM4,000 × 24% tax rate).

Income Tax Exemptions for Benefits-in-Kind

Certain employer-provided benefits receive preferential tax treatment:

Fully Tax-Exempt Benefits:

• Employer-paid group medical/health insurance.
• Employer-paid group life insurance (death benefit to dependents).
• Employer-paid medical checkups.
• Educational sponsorship programs (with limits).
• Uniforms/safety equipment.

Partially Tax-Exempt:

• Housing accommodation (RM750–3,000 depending on location and rank).
• Vehicle provision (RM2,000–8,000 depending on vehicle value).
• Meal allowances (RM100–250 monthly).
• Utility reimbursement (limited amounts).

Tax Planning Strategy: Sophisticated employers structure compensation packages maximizing tax-exempt components (group medical, housing allowance) rather than pure salary, effectively enhancing employee take-home while reducing employer tax obligations.

Filing contribution forms and deadlines

Quarterly or annual filings:

• HRDF Reconciliation: Submitted monthly but reconciled quarterly.
• Year-End Adjustment: Many employers reconcile all contributions in January for prior year discrepancies.
• Audit/Tax Filing: Supporting contribution documents required during tax audits.

If deadline falls on public holiday, advance payment to last working day before holiday (no grace period beyond that date).