Supreme Court Clarifies Burden of Proof in ERISA Prohibited Transaction Claims

Supreme Court Issues Landmark ERISA Decision in Cunningham v. Cornell

On April 17, 2025, the United States Supreme Court issued its long-awaited decision in Cunningham et al. v. Cornell University et al., case number 23-1007. The Court reversed the Second Circuit’s prior ruling and held that plaintiffs asserting claims under the Employee Retirement Income Security Act of 1974 (“ERISA”) for prohibited transactions are not required to plead the inapplicability of statutory exemptions found in ERISA Section 408. Instead, the Court confirmed that these exemptions constitute affirmative defenses which must be raised and proven by defendants.

This ruling resolves a longstanding split amongst Appellate Circuit Courts and will have significant consequences for fiduciaries, plan sponsors, and participants in employer-sponsored retirement plans.

Resolving a Circuit Split Over ERISA Prohibited Transaction Pleading Standards

As described in our October 2024 update, the plaintiffs alleged that Cornell University breached its fiduciary duties by authorizing excessive recordkeeping fees and maintaining imprudent investment options within the university’s 403(b) retirement plan. Plaintiffs brought claims under Section 406(a)(1)(C) of ERISA, which prohibits certain transactions between a retirement plan and a party in interest.

Lower Courts Required Plaintiffs to Disprove ERISA Section 408 Exemptions

The United States District Court for the Southern District of New York initially dismissed the action at the pleading stage, holding that the plaintiffs were required to allege “some evidence of self-dealing or other disloyal conduct.”  The Second Circuit affirmed this decision, determining that plaintiffs were required to affirmatively plead facts demonstrating that no exemptions under Section 408 applied to their claims.

This position was consistent with the approach adopted by the Third, Seventh, and Tenth Circuits, but conflicted with decisions from the Eighth and Ninth Circuits, which placed the burden on defendants to establish the applicability of exemptions.

Writing for a unanimous Court, Justice Sotomayor explained that the exemptions in ERISA section 408 operate as affirmative defenses and are not part of the plaintiff’s initial burden. Section 406(a)(1)(C) sets forth a categorical prohibition on certain transactions, and plaintiffs need only allege facts showing such a transaction occurred.  There is no statutory basis to require plaintiffs to plead any additional elements, and doing so would be contrary to Supreme Court precedent dictating which party must plead and prove statutory exemptions.

Practical Impact on ERISA Prohibited Transaction Litigation

The Court further reasoned that requiring plaintiffs to negate all possible exemptions at the outset would be impractical, given that there are 21 statutory exemptions and hundreds more exemptions incorporated through Department of Labor regulations.  Thus, “it is defendant fiduciaries who bear the burden of pleading and proving that a [Section 408] exemption applies to an otherwise prohibited transaction.”
The Court’s decision clarifies that, in prohibited transaction cases under ERISA, plaintiffs are only responsible for alleging the basic elements of the claim.

Once that burden is met, the responsibility shifts to defendants to prove that the transaction in question fits within one of the statutory exemptions. This ruling simplifies the procedural requirements for plaintiffs and is expected to have a substantial impact on the viability of prohibited transaction claims going forward.

Best Practices Moving Forward to Avoid ERISA Liability

The decision in Cunningham also provides important guidance for plan fiduciaries and service providers. Entities involved in plan transactions should ensure that arrangements with service providers are well-documented and meet ERISA’s standards, as courts will scrutinize whether the transactions fall within permissible exemptions only after plaintiffs have made a plausible showing of a prohibited transaction.  Specifically, plan sponsors and fiduciaries should ensure the services their plans are receiving are necessary and that the corresponding fees are reasonable.