A method of manufacture of an integrated circuit packaging system includes: providing a substrate; mounting an interposer having a top interposer surface over the substrate; attaching an interposer pad extension to the top interposer surface, the interposer pad extension having an extension contact surface and a lower contact surface, the surface area of the extension contact surface being smaller than the surface area of the lower contact surface; and forming a package encapsulation on the substrate, the interposer, and the interposer pad extension, the package encapsulation having a recess exposing the top interposer surface, the interposer pad extension embedded only in the package encapsulation.