Cunningham v. Cornell Univ., 2025 WL 1128943 (U.S. 2025)
Available at https://www.supremecourt.gov/opinions/24pdf/23-1007_h3ci.pdf
A group of current and former participants in two ERISA retirement plans sued the sponsoring employer and other plan fiduciaries, asserting that the plans engaged in prohibited transactions and paid more than reasonable fees for plan recordkeeping. (As background, ERISA § 406(a) prohibits transactions between plans and parties in interest, including plan service providers. ERISA § 408(b) provides exemptions for certain transactions, including reasonable arrangements for necessary plan operational services.) The Second Circuit ruled in favor of the plan fiduciaries without a trial, explaining that it was not enough for the participants to allege the existence of a prohibited transaction; they also needed to address the exemptions by plausibly alleging that the services were unnecessary or involved unreasonable compensation, which they failed to do. The participants appealed to the U.S. Supreme Court.
The Court reversed the Second Circuit’s decision, concluding that the participants only needed to allege the presence of a prohibited transaction to pursue their claims, and did not need to also assert that the transaction was unnecessary or unreasonable. The Court explained that a transaction is “presumptively unlawful” if it satisfies the elements set forth in ERISA § 406(a)(1)(C)—essentially, a fiduciary causing the plan to engage in a transaction that constitutes the furnishing of goods, services, or facilities between the plan and a party in interest. The fiduciaries argued that because ERISA § 406(a) expressly states that the prohibitions apply except as provided in ERISA § 408, the provisions should be read together to define a prohibited transaction. But the Court explained that the exemptions are “laid out apart from the prohibitions” and thus constitute “affirmative defenses,” meaning that it is up to the plan fiduciaries to assert that they apply. Given that there are 21 statutory exemptions and hundreds of regulatory exemptions, the Court found it unreasonable to require participants to anticipate and proactively refute potentially relevant exemptions, especially because facts pertinent to the exemptions are typically in the fiduciary’s possession. The fiduciaries pointed out that plan administration effectively requires transactions between plans and service providers, and that enabling participants to bring lawsuits by simply asserting the occurrence of a transaction set forth in ERISA § 406(a)(1)(C) would lead to “an avalanche of meritless litigation.” The Court acknowledged this as a serious concern but emphasized that the statutory text and structure govern, and that existing court procedures and rules (such as requirements for detailed pleadings, sanctions for frivolous claims, and shifting litigation costs) provide tools to filter out baseless claims.
EBIA Comment: The case now returns to the lower court, where the plan fiduciaries can present the exemptions as defenses and the participants can dispute whether the exemption requirements were met. The broad implications of this case are concerning, potentially leading to more lawsuits with fewer dismissals at early stages and requiring plans and fiduciaries to expend considerable time and money responding to lawsuits that assert the mere existence of a prohibited transaction. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.L (“Prohibited Transactions”), XXIV.M (“Exemptions to Prohibited Transactions”), and XXXVII.H (“Claims for Breach of Fiduciary Duty”). See also EBIA’s ERISA Compliance manual at Section XXVIII.D (“Prohibited Transactions Under ERISA § 406”).
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
