Under settings and S pen I have the box checked to notify me if the pen is away from the device. I have left the pen on a table and walked away 80ft and also walked away with pen in hand and phone left on table.(which is stupid but I'll try anything) Nothing happens. No message, no beeping. When the S pen is removed I do get notes that pop up and even an icon in the notification bar that the pen is removed but other that that if there is some sort of alarm that is supposed to go off it isn't.
I have the Note II on a different carrier, but the feature works for me. I have noticed that you have to have walls or a considerable distance between the phone and the pen for the phone to alert you. Mine beeps and vibrates but the beep is not that noticable, while the vibration is noticeable. There is also a pop-up window that comes up to let you know that the S Pen isn't in the phone.
S note does open when I take the pen out, but leaving the pen behind there is no vibration, no pop up warning, no alarm. It took like a dozen times of taking the S pen out before that other option worked where "quick note" or whatever its called popped up on top of the S note screen even though that options was selected too.