S-Pen detection disables the digitiser if the S-Pen is IN the holster. It save a bit of power.
I have the HM5100 Bluetooth Pen. It works like this.
With "Disable pen detection" unchecked I can use the BT spen while the note' spen is still in the holster.
With "Disable pen detection" checked the BT spen does not work util I remove the note' spen from the holder.