The exclusion of micro-employers from auto-enrolment was ruled out due to the number of employees that would be excluded and "substantial" practical issues.
The Making Automatic Enrolment Review - published this morning - said excluding micro-employers would bar 1.2 million workers from auto-enrolment.
It said there would be substantial practical problems in enforcing boundaries - noting that identifying those employers with five employees at any one time was "almost certainly" beyond the capacity of current systems.
It added incentives to hide or distort the number of employees could be considerable.
The review said the exclusion of micro-employers would also create a significant disincentive to business growth. It noted the pension costs alone of moving from four employees to five could be over £1,500.
It also found some competitive distortions might be created between employers either side of the size cut-off point.
The reviewers recommended the Pensions Regulator should flag up in the "strongest terms possible" to micro-employers that the design of NEST specifically takes account of their needs.
There also needs to be a well-structured communications exercise to ensure as many small employers as possible know and understand what is expected of them.
The Review also said some way should be found to assure smaller employers they will not be held liable for their scheme choice should something subsequently go wrong.
Paul Bruns and Elaine Parkes
3,000 left to transfer
Record numbers of people aged 90 plus
From 3 to 10 October