Basically, the generate excess pore pressures above water table option allows you to specify whether you want immediate or long-term consolidation settlement to be calculated above the water table. In most cases, turning this option on, and considering the consolidation above the water table as part of the total consolidation settlement, is appropriate.
When the option is not selected, when there is no excess pore water pressure generated above the water table, the layers above the water table will have an immediate consolidation settlement:
This option has the most influence in cases where the water table is low in the clay layer. The option is also explained in the Online Help.