The storage and release of triacylglycerol (TAG) in lipid droplets (LDs) is regulated by dynamic protein interactions. α/β hydrolase domain-containing protein 5 (ABHD5; also known as CGI-58) is a membrane/LD bound protein that functions as a co-activator of Patatin Like Phospholipase Domain Containing 2 (PNPLA2; also known as Adipose triglyceride lipase, ATGL) the rate-limiting enzyme for TAG hydrolysis. The dysregulation of TAG hydrolysis is involved in various metabolic diseases such as metabolic dysfunction-associated steatotic liver disease (MASLD). We previously demonstrated that ABHD5 interacted with PNPLA3, a closely related family member to PNPLA2. Importantly, a common missense variant in PNPLA3 (I148M) is the greatest genetic risk factor for MASLD. PNPLA3 148M functions to sequester ABHD5 and prevent co-activation of PNPLA2, which has implications for initiating MASLD; however, the exact mechanisms involved are not understood. Here we demonstrate that LD targeting of both ABHD5 and PNPLA3 I148M is required for the interaction. Molecular modeling demonstrates important resides in the C-terminus of PNPLA3 for LD binding and fluorescence cross-correlation spectroscopy demonstrates that PNPLA3 I148M greater associates with ABHD5 than WT PNPLA3. Moreover, the C-terminus of PNPLA3 is sufficient for functional targeting of PNPLAs to LD and the interaction with ABHD5. In addition, ABHD5 is a general binding partner of LD-bound PNPLAs. Finally, PNPLA3 I148M targeting to LD is required to promote steatosis in vitro and in the liver. Overall results suggest that PNPLA3 I148M is a gain of function mutation and that the interaction with ABHD5 on LD is required to promote liver steatosis.