As CPAs in tax practice, while our primary focus may not always be on the Employee Retirement Income Security Act of 1974 (ERISA), understanding its intricacies, particularly concerning retirement plans, is crucial as plans covered by ERISA are often part of tax planning for our business clients. The recent Supreme Court decision in Cunningham et al. v. Cornell University et al., No. 23–1007, decided April 17, 2025, provides significant clarification on the pleading requirements for prohibited transaction claims under ERISA § 1106(a)(1)(C). This article will dissect the facts, the petitioners’ arguments, the Court’s legal analysis, its application to the case, and the resulting conclusions, offering insights relevant to our practice.

Background: The Allegations Against Cornell

The case originated from a class action lawsuit brought by current and former Cornell University employees who participated in two defined-contribution retirement plans between 2010 and 2016. The petitioners, representing this class, sued Cornell University and other plan fiduciaries in 2017, alleging violations of ERISA § 1106(a)(1)(C). This section prohibits plan fiduciaries from causing a plan to engage in a transaction that the fiduciary knows or should know constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a "party in interest".

The crux of the petitioners’ claim was that Cornell caused the plans to engage in prohibited transactions by paying substantially more than reasonable fees for recordkeeping services to the Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA) and Fidelity Investments Inc.. They argued that TIAA and Fidelity, as service providers, were parties in interest under ERISA § 1002(14), and thus, their provision of recordkeeping and administrative services constituted a prohibited transaction unless an exemption applied. The petitioners specifically alleged that the fees paid, ranging from $115 to $200 per participant, significantly exceeded a reasonable fee of approximately $35 per participant per year.

The Journey Through the Courts and the Petitioners’ Request

The District Court initially dismissed the prohibited-transaction claim, holding that the plaintiffs needed to plead "some evidence of self-dealing or other disloyal conduct" in addition to the elements of § 1106(a)(1)(C). The Second Circuit Court of Appeals affirmed the dismissal, but on a different basis. While disagreeing with the requirement to plead self-dealing, the Second Circuit reasoned that ERISA § 1108(b)(2)(A), which exempts transactions involving necessary services with reasonable compensation, was incorporated into the prohibitions of § 1106(a). Consequently, the Second Circuit held that to state a claim, the petitioners were required to plead that the transaction was "unnecessary or involved unreasonable compensation". The court found the petitioners’ allegations regarding unreasonable fees insufficient, as they did not adequately address the relative quality of services or suggest the fees were so disproportionately large as to not be the product of arm’s-length bargaining.

The petitioners then sought relief from the Supreme Court, arguing that to state a claim under § 1106(a)(1)(C), they only needed to plausibly allege the three elements contained within that provision itself, without needing to address potential § 1108 exemptions.

The Supreme Court’s Legal Analysis: Upholding the Statutory Structure

The Supreme Court, in a unanimous decision delivered by Justice Sotomayor, reversed the Second Circuit’s ruling. The Court’s analysis centered on the statutory structure of ERISA and the established principles of statutory interpretation regarding exceptions and affirmative defenses.

The Court began by outlining the three elements of a prohibited transaction under § 1106(a)(1)(C):

The fiduciary caused the plan to engage in a transaction.
The fiduciary knew or should have known the transaction constituted a direct or indirect furnishing of goods, services, or facilities.
The transaction was between the plan and a party in interest.

The Court emphasized that this bar is "categorical" and does not exclude transactions that were necessary or involved reasonable compensation.

Crucially, the Court held that the exemptions in § 1108 do not impose additional pleading requirements for § 1106(a)(1) claims. The Court relied on the well-settled "general rule of statutory construction that the burden of proving justification or exemption under a special exception to the prohibitions of a statute generally rests on one who claims its benefits" (citing FTC v. Morton Salt Co., 334 U. S. 37, 44–45 (1948)).

Drawing a parallel to its decision in Meacham v. Knolls Atomic Power Laboratory, 554 U. S. 84, 91, 95 (2008), the Court stated that when a statute has "exemptions laid out apart from the prohibitions," and the exemptions "expressly refe[r] to the prohibited conduct as such," the exemptions ordinarily constitute "affirmative defense[s]". The Court noted that § 1108 is structured precisely this way, enumerating exemptions separately from the prohibited transactions outlined in § 1106(a), and explicitly referring to the "prohibitions...provided in section 1106". Therefore, like the ADEA exemption in Meacham, the § 1108 exemptions are affirmative defenses that must be pleaded and proved by the defendants seeking to benefit from them.

The Court rejected the argument that the introductory phrase "[e]xcept as provided in section 1108" in § 1106(a) incorporates the § 1108 exemptions as elements of a § 1106(a) violation. This reading, the Court explained, ignores the "orthodox format of an affirmative defense" in which Congress wrote the § 1108 exemptions. The headings of the sections, "Prohibited transactions" for § 1106 and "Exemptions from prohibited transactions" for § 1108, further support this understanding.

The Court also highlighted the impracticality of requiring plaintiffs to plead and disprove all potentially relevant § 1108 exemptions, noting that there are 21 statutory exemptions and hundreds of regulatory exemptions issued by the Secretary of Labor under § 1108(a).

Furthermore, the Court distinguished this case from the criminal pleading rule established in United States v. Cook, 17 Wall. 168 (1872). The Court clarified that Cook set forth a rule for criminal indictments based on constitutional considerations not applicable in the civil context. Even in criminal cases, the general rule remains that a pleading need not negate the matter of an exception made by a separate clause (citing Dixon v. United States, 548 U. S. 1, 13 (2006)).

Finally, the Court addressed the respondents’ concerns about a potential surge in meritless litigation. While acknowledging these concerns, the Court stated that they cannot override the clear statutory text and structure. The Court pointed to several tools available to district courts to screen out meritless claims, including Federal Rule of Civil Procedure 7(a) allowing courts to order a reply to an answer asserting an exemption, dismissal for lack of a concrete injury under Article III, limitations on discovery, Rule 11 sanctions, and cost shifting under ERISA § 1132(g)(1).

Applying the Law to the Facts: Cornell’s Burden

Applying its legal analysis to the facts of the Cunningham case, the Supreme Court concluded that the petitioners only needed to plausibly allege the three elements of a § 1106(a)(1)(C) violation: that Cornell caused the plans to engage in transactions with TIAA and Fidelity (parties in interest) for recordkeeping services (furnishing of services), knowing or having reason to know the nature of the transactions.

The petitioners were not required to plead that the exemption under § 1108(b)(2)(A) – for necessary services with no more than reasonable compensation – did not apply. The burden to plead and prove that this exemption (or any other) applies rests squarely with Cornell and the other plan fiduciaries as an affirmative defense.

Conclusion: Affirmative Defenses and Pleading Standards Under ERISA

The Supreme Court’s decision in Cunningham v. Cornell University reaffirms the established principles of statutory interpretation and clarifies the pleading burden in ERISA prohibited transaction claims. Plaintiffs alleging a violation of § 1106(a)(1)(C) need only plausibly allege the elements of that section. They are not required to anticipate and negate the applicability of any of the exemptions listed in § 1108. These exemptions, including the one for necessary services with reasonable compensation in § 1108(b)(2)(A), are affirmative defenses that the defendant fiduciaries bear the burden of pleading and proving.

For CPAs in tax practice who advise clients on the administration of retirement plans, this decision underscores the importance of understanding the prohibited transaction rules under ERISA and the availability of exemptions. While the immediate impact may be on litigation strategy, a broader awareness of fiduciary responsibilities and the potential for claims related to plan expenses remains relevant in our advisory role. Plan fiduciaries must be prepared to demonstrate that transactions with parties in interest fall within the scope of a statutory or regulatory exemption if challenged. The Court’s decision clarifies the initial hurdle for plaintiffs but does not diminish the ultimate responsibility of fiduciaries to ensure compliance with ERISA’s prohibited transaction rules. The availability of various procedural tools for district courts to manage potentially meritless litigation, as highlighted by the Court, will also be an area to observe for its practical impact on ERISA litigation.

Prepared with assistance from NotebookLM.

Case Text:

Cunningham et al. v. Cornell University et al., US Supreme Court No. 23–1007, decided April 17, 2025