Supreme Court wrestles with who must plead ERISA exemptions in prohibited-transaction suits

Petitioners asked the Supreme Court on Wednesday to reverse an appellate ruling that dismissed a prohibited-transaction claim under the Employee Retirement Income Security Act after the court found plaintiffs had not pleaded enough facts to survive a motion to dismiss.

At argument, counsel for the petitioners, Mr. Wang, said Congress wrote the statute so that plaintiffs could plead a violation of 29 U.S.C. §1106 and defendants would use the exceptions in §1108 as affirmative defenses. "When Congress enacted ERISA, it identified a number of prohibited transactions and codified that understanding in 29 U.S.C. section 1106," Mr. Wang told the justices, and he urged the court to "reverse the judgment of the second circuit."

The case centers on whether routine service-provider arrangements that involve plan recordkeeping — the sort of contracts many employers and universities use — automatically survive a motion to dismiss simply because the arrangement exists, or whether plaintiffs must plead additional facts (for example, that fees were unreasonable or services unnecessary) to make a claim plausible at the pleading stage.

Why it matters: A ruling for petitioners would generally permit plaintiffs to plead a §1106 prohibited-transaction claim on the basis that a plan engaged a party in interest and then rely on discovery and…