Can't speak from experience with this radio, but I looked at the manual and it says about the option that:
Squelch/ATT select FUNC — SQLTYP
Sets to use the S-Meter Squelch or the Attenuator function for the
The way I would read this is that it does not change the squelch behavior but controls whether the knob changes the squelch level or changes the attenuation.
The manual later says:
When you rotate [SQL]S clockwise beyond the center position,
[SQL]S becomes an ‘S-meter Squelch’ or ‘Attenuator.’ Select
the [SQL]S option in the MENU mode. (p. 14)
I read this as the menu option affects the behavior of the upper range of the SQL knob, and the lower range is always “regular” squelch.
It's not at all clear to me what “S-meter squelch” as opposed to regular squelch means, however, but it's clear (from the use of the upper range of the SQL knob) that in either case these are functions for dealing with very strong signals. That is when you would want an attenuator: when the incoming signal is too strong for the receiver to function correctly.
One possible explanation is that in the attenuator mode it doesn't increase the squelch level higher but adds attenuation (presumably before the squelch's sensor), but in the S-meter squelch mode it just increases squelch further. But it's really unclear and I'd suggest conducting some experiments with a nearby friend to see how it behaves in the two cases with a strong signal.