The most common causes of childhood interstitial lung disease (chILD) are autosomal recessive mutations in the gene encoding ATP Binding Cassette A3 (ABCA3) protein, a lamellar body (LB) associated lipid transporter exclusively expressed within the alveolar epithelial type II cells (AEC2s) in the lung. Instability of primary AEC2s in culture has prevented studies of ABCA3 mutations, resulting in limited understanding of disease pathogenesis. To overcome this challenge, we developed AEC2-like cells from human pluripotent stem cells (PSCs) in vitro, allowing study of normal ABCA3 function and perturbations that result from ABCA3 mutations. To develop an AEC2 model that would recapitulate ABCA3 biology, we targeted human PSC lines with a knock-in GFP fusion reporter (ABCA3:GFP). Differentiations of PSCs into AEC2s (iAEC2s) resulted in exclusive expression of ABCA3:GFP in iAEC2s and intracellular localization to LAMP3+ vesicles, reminiscent of endogenous ABCA3. Moreover, we find these ABCA3:GFP+ iAEC2s express LBs, process surfactant proteins, and secret surfactant lipids, indicative of preserved ABCA3 function. To study the effects of ABCA3 mutations using our model, we generated two sets of PSC reporter lines: 1) two patient-derived iPSC lines carrying rare homozygous E690K and W308R ABCA3 mutations predicted to affect ABCA3 function or trafficking, respectively, and their two syngeneic gene-corrected lines each targeted with the AEC2-specific knock-in fluorescent reporter SFTPCtdTomato; and 2) three syngeneic ABCA3:GFP knock-in iPSC lines encoding wildtype, E690K, or W308R proteins. Directed differentiation of patient iPSCs into iAEC2s revealed attenuated secretion of surfactant-specific lipids, recapitulating clinical findings of surfactant deficiency. Examination of ABCA3 protein trafficking using the ABCA3:GFP fusion reporter revealed retained E690K and W308R mutant ABCA3 protein processing and trafficking compared to the wildtype protein by confocal microscopy and western blot analyses, however mutant iAEC2s exhibited smaller LBs, indicative of defective ABCA3-dependent lipid transport. Bulk RNA sequencing of mutant and gene-corrected SFTPCtdTomato- or ABCA3:GFP-expressing iAEC2s revealed enrichment of the TNF𝛼-NF𝜅B pathway in both W308R and E690K mutant iAEC2s, validated by lentiviral reporter assays and secretion of NF𝜅B-driven cytokines. Thus, we provide insights into how ABCA3 mutations alter AEC2 physiology and developed a platform to study other genetic AEC2 diseases through our ABCA3:GFP reporter system. / 2021-05-26T00:00:00Z