C.,
I have a 5 year old in Young-5's this year who is also very small for his age. He is also in the 3rd percentile. He turned 5 in Aug and is only in size 4T, I did my school clothes shopping for him in the toddlers dept.
Although he is a bright boy, I put him in Young-5's because sometimes boys have trouble sitting still and just being emotionally ready for the structure of school. I wanted to give him that extra year. There are lots of other things they learn besides letters, math, science. If he has a good teacher she can give him things to stimulate him academically if he seems too advanced.
They have been working on staying in their seats, raising hands, quiet voices, waiting turns, sharing, walking single file. All these seem like basic concepts, and I thought my son was good with them, but I have noticed that they ALL need practice in these things (I volunteer in the classroom one day a week) to be consistent in them, so that school as a whole is easier for them.
For me I would rather he be the oldest in his class instead of the youngest, especially because of his small size. He will be the first in his class to get his drivers license, not the last one driving around with other kids. I think it increases the likelihood that he will be in leadership positions instead of just following the older kids, who may be more mature than he is. I just think that the extra year will give him an advantage in so many other ways, not just for his size, because chances are that he is going to always be small and in high school it will even out, and he is most likely going to be the little guy, but maybe if he has that extra year now he will be able to handle it with a little more grace, and maturity? (I am hopeing).
I have 5 boys, and I didn't put the oldest 2 in a Young-5's program simply because my school system at the time wasn't good at communication and I wasn't made aware of it. My 3rd son is in First Grade now and I think it helped him, he is more shy and sweet and I think he is better able to navigate socially because of that extra year. My youngest is only 23 months old but I am already thinking I will go this route with him too.
I hope this was helpful to you.