In Cunningham v. Cornell, the Supreme Court unanimously held that a plaintiff can state a prohibited transaction claim under ERISA ' 406(a) by simply alleging that a plan fiduciary caused the plan to engage in a transaction with a "party in interest" as proscribed by ' 406(a).1 Prior to Cunningham, courts were divided over the allegations necessary to state a prohibited transaction claim under ERISA ' 406(a). Although ERISA ' 406(a) prohibits a plan fiduciary from causing the plan to engage in a transaction with a "party in interest," including transactions involving the furnishing of services to the plan, ' 408 authorizes the Secretary of Labor to grant administrative exemptions from those prohibitions, and also provides a number of statutory exemptions for many common types of plan transactions. One of those statutory exemptions provides relief for "reasonable arrangements" for services provided to the plan, as long as the services are "necessary" for the plan's operation and the amount paid for the services is "reasonable."
Like the Supreme Court in Cunningham, the Eighth Circuit had previously ruled that a complaint asserting a prohibited transaction claim involving the provision of services must allege only that ERISA ' 406(a)(1)(C) was violated, and need not address the exemption for services in ' 408(b)(2) to survive a motion to dismiss.2 Other courts, however, including the Third, Tenth, and Seventh Circuits,3 had concluded that reading ' 406(a)(1)(C) in isolation from the ' 408(b)(2) exemption for services would lead to "absurd results," because it would appear to "prohibit fiduciaries from paying third parties to perform essential services in support of a plan,"4 including "recordkeeping and administrative services."5
The plaintiffs in Cunningham had brought an ERISA action alleging, among other things, that the fiduciaries of two defined contribution plans sponsored by Cornell University had caused the plans to engage in prohibited transactions with providers of recordkeeping services in violation of ERISA ' 406(a)(1)(C). The Second Circuit affirmed the lower court's dismissal of that claim, reasoning that the ' 408 exemptions could not "be understood merely as affirmative defenses to the conduct proscribed in ' 406(a)," and that "at least some of those exemptions'particularly, the exemption for reasonable and necessary transactions codified by ' 408(b)(2)(A)'are incorporated into ' 406(a)'s prohibitions."6 Although fiduciary defendants...
