Microsoft Exchange Online Licensing: Plan 1 vs Plan 2, Archiving, and the Right-Sizing Framework

Exchange Online Plan Structure

Exchange Online exists in two primary standalone plans — Plan 1 and Plan 2 — plus as a component of Microsoft 365 and Office 365 suite licences. Understanding the standalone plans is essential because, in an enterprise M365 deployment, Exchange Online is almost never purchased as a standalone product; it is included in M365 E3 (Plan 2), M365 E1 (Plan 1), and other suite licences. The question is therefore not "which Exchange plan should we buy?" but rather "which M365 tier provides the Exchange Online capabilities our user population requires?"

The critical differentiators between Plan 1 and Plan 2 are the In-Place Archive, Litigation Hold, and full journaling capabilities. These are not edge-case features — they are fundamental to the email retention and compliance strategy of any organisation operating under regulatory obligations, legal discovery requirements, or internal records management policies.

In-Place Archiving: Why It Matters and What It Requires

The In-Place Archive in Exchange Online Plan 2 (included in M365 E3 and above) provides an unlimited secondary mailbox for each user, accessed through Outlook as the "Online Archive." With auto-expanding archiving enabled, the archive grows indefinitely as old mail is moved from the primary mailbox by a retention policy.

In-Place Archiving solves a fundamental email management problem: without archiving, organisations must either tolerate ever-growing primary mailboxes (with associated storage cost and performance implications) or implement aggressive deletion policies that destroy potentially business-relevant or legally required records. Neither is acceptable in a regulated environment.

The archiving capability is included only in Exchange Online Plan 2. Users on Plan 1 (including M365 E1, Business Basic, and Microsoft 365 F-series licences) do not have access to the In-Place Archive. This has a direct compliance implication: if an organisation's email retention policy requires retaining messages beyond the primary mailbox storage capacity, Plan 1 users are systematically non-compliant unless supplementary archiving tools are purchased or the organisation explicitly accepts the compliance gap.

Exchange Online Archiving Add-On

Microsoft offers Exchange Online Archiving (EOA) as a standalone add-on for Exchange Online Plan 1 users. EOA provides In-Place Archive functionality — unlimited archive storage, auto-expanding archiving, and retention policy support — without requiring an upgrade to Plan 2 or M365 E3.

The practical use case for EOA is specific: it is appropriate when an organisation is on M365 E1 or Business Basic (which includes Plan 1) and needs archiving for all or some users, but does not yet require the other Plan 2 / E3 additions (Litigation Hold, eDiscovery, desktop apps, Intune). EOA at approximately $3/user/month is substantially cheaper than upgrading to E3 at ~$31.50/user/month solely for the archive capability.

However, EOA does not include Litigation Hold. For organisations that have or expect litigation exposure, Litigation Hold is a hard requirement for any user who may be subject to a legal hold. These users require Exchange Online Plan 2 — EOA alone is insufficient.

Litigation Hold: Who Actually Needs It

Litigation Hold is a Plan 2 (M365 E3) feature that preserves mailbox content — including deleted items and modified versions of items — for legal discovery purposes. When Litigation Hold is applied to a mailbox, it overrides retention policies that would otherwise delete content, ensuring that nothing is permanently removed from the mailbox during the hold period.

The practical question is not whether Litigation Hold is valuable — it clearly is — but whether every user in the organisation requires it. The answer, for most organisations, is no. Litigation Hold is relevant for users whose email is likely to be subject to a legal discovery request: executives, in-house legal counsel, key staff in functions that carry litigation exposure (finance, HR, commercial/procurement). The standard administrative, operational, and technical user population rarely triggers individual-level legal holds in practice.

This creates an opportunity for targeted licence right-sizing: deploying M365 E3 (with Plan 2 and Litigation Hold) for the user population that genuinely requires it, and M365 E1 (with Plan 1) or even Business Basic for the broader workforce, with the archiving gap addressed through EOA for the E1 population. The resulting mixed-licence model is more complex to administer but can generate meaningful cost savings for large organisations.

Shared Mailbox Licensing: The Rules and the Gaps

Shared mailboxes are a specific Exchange Online object type that multiple users access through Outlook using "Send As" or "Send on Behalf" permissions. They are commonly used for shared inboxes (info@, support@, sales@) and functional email addresses that multiple staff monitor.

Microsoft's licensing rule for shared mailboxes is: a shared mailbox under 50 GB in size does not require a dedicated Exchange Online licence — the required Exchange Online service is provided through the accessing users' individual licences. A shared mailbox that exceeds 50 GB requires an Exchange Online Plan 2 licence (or an M365 licence that includes Plan 2) assigned directly to the shared mailbox.

The 50 GB rule is frequently misunderstood in two directions. First, organisations that have shared mailboxes well under 50 GB assign unnecessary Exchange Plan 1 or Plan 2 licences to them, paying for licences that are not required. Second, organisations that allow shared mailboxes to grow beyond 50 GB without assigning a licence are technically non-compliant with Microsoft's licensing terms — though Microsoft rarely enforces this proactively, it creates a true-up exposure.

Archiving for Shared Mailboxes

A shared mailbox under 50 GB does not require a dedicated licence — but it also does not have In-Place Archiving unless a Plan 2 licence (or EOA add-on) is assigned. For shared mailboxes that receive high email volume and have retention requirements, the absence of archiving means content must either be deleted when the mailbox approaches 50 GB or a licence must be purchased. This is a hidden compliance cost that is frequently discovered during a true-up or audit preparation rather than proactively managed.

The correct approach is to include shared mailboxes in the annual licence usage review, assess their current size and growth rate, and assign archiving licences proactively to shared mailboxes that are approaching the 50 GB threshold or that have material email retention requirements.

Exchange Online Within M365 Suites: The Inclusion Map

Understanding which M365 suite licences include which Exchange Online plan is essential for making correct tier decisions. The inclusion map as of 2026 is:

The critical implication of this table: any user on Business Basic, Business Premium, or E1 does not have In-Place Archiving or Litigation Hold. If your compliance framework requires these capabilities for those users, you must either upgrade to E3 or add the appropriate add-on licences.

Exchange Online Protection and Defender for Office 365

Exchange Online Protection (EOP) — the basic anti-spam and anti-malware filtering layer — is included in all Exchange Online plans at no additional cost. EOP provides basic inbound email filtering sufficient for commodity spam and malware scenarios.

Defender for Office 365 Plan 1 and Plan 2 are the premium email security add-ons that extend protection to advanced phishing, business email compromise (BEC), and zero-day malware scenarios through Safe Links, Safe Attachments, and anti-phishing policies. The licence inclusion map is: Defender for Office 365 Plan 1 is included in Microsoft 365 Business Premium; Plan 1 is also available as a standalone add-on; Plan 2 is included in M365 E5 and available as an add-on to E3.

For organisations on M365 E3 that face elevated email security risk — financial services, executive populations, organisations that have experienced BEC incidents — the Defender for Office 365 Plan 2 add-on (approximately $5/user/month) is typically a better investment than upgrading to E5 solely for email security. The E5 upgrade includes a substantial security and compliance suite beyond email security; if the requirement is specifically email protection, the targeted add-on is more commercially efficient than the full E5 bundle. This is a specific example of the broader principle examined in the E3 vs E5 comparison guide.

The Exchange Online Right-Sizing Framework

Applying a structured right-sizing methodology to your Exchange Online deployment requires segmenting your user population by their actual email requirements across five dimensions:

1. Archiving requirement: Does this user have a regulatory or policy-driven email retention requirement that exceeds the 50GB primary mailbox? If yes, Plan 2 or EOA add-on is required.
2. Litigation hold exposure: Is this user in a role that creates a reasonable probability of being subject to a legal hold? If yes, Plan 2 (M365 E3) is required — EOA does not provide Litigation Hold.
3. eDiscovery relevance: Will this user's mailbox need to be included in eDiscovery searches in support of regulatory investigations or litigation? Plan 2 is required for Compliance-managed eDiscovery (through Purview).
4. Email volume: Does this user receive or send high email volumes that will cause the 50GB primary mailbox to fill within a reasonable period (12–24 months)? If yes, archiving (Plan 2 or EOA) is required.
5. Mailbox functionality: Does this user require full Outlook client functionality, including all calendar sharing, task delegation, and resource booking features? Both plans provide full Outlook functionality — this is not a differentiator between Plan 1 and Plan 2.

Users who answer "no" to archiving, litigation hold, and eDiscovery requirements, and whose mailbox volume is manageable within 50GB, can be served by Exchange Online Plan 1 (included in M365 E1 or Business Basic). Users who answer "yes" to any of the first three questions require Plan 2 (M365 E3 or above). This segmentation typically reveals that 20–40% of an organisation's user population genuinely requires Plan 2, with the remainder served adequately by Plan 1.

Frequently Asked Questions

Do we need Exchange Online Plan 2 for compliance, or can we use third-party archiving?

Third-party email archiving solutions (Mimecast, Proofpoint Archive, Barracuda, and others) can provide email archiving and eDiscovery capabilities without requiring Exchange Online Plan 2. This was a common architectural choice when organisations ran on-premises Exchange and added cloud archiving as a managed service. In a fully Exchange Online environment, the native Plan 2 archiving is typically cheaper and more integrated than a third-party overlay — but if you have an existing third-party archiving investment, the incremental value of Plan 2 archiving may be limited until that contract expires.

What is the Exchange Online Kiosk plan?

Exchange Online Kiosk (included in M365 F1) provides a 2GB mailbox with OWA (Outlook on the web) access only — no Outlook client connectivity, no mobile device sync via ActiveSync for full access. It is designed for task workers who need basic email capability without full productivity suite requirements. The 2GB mailbox limit is extremely constraining for any user receiving regular email; F1 is appropriate only for roles where email is genuinely peripheral to the job function.

Can we have some E1 and some E3 users in the same Exchange Online tenant?

Yes. Mixed M365 licences within a single tenant are fully supported and common. E3 users will have 100GB mailboxes with In-Place Archiving and Litigation Hold; E1 users will have 50GB mailboxes without these features (unless EOA is added). The Exchange admin centre and Purview compliance portal allow you to apply different policies to different user populations based on their licence tier.

What happens to email archiving if we downgrade from E3 to E1?

If you remove Exchange Online Plan 2 from a user who has an active In-Place Archive, the archive content is not immediately deleted — it enters a "preservation only" state and the user loses access to it. To maintain access, the Plan 2 licence must be restored or the content must be exported before downgrade. This is a significant administrative consideration when planning any M365 tier reduction — always export or migrate archive content before removing Plan 2 licences from users with populated archives.