When checked it removes the plugin’s stored settings and role capability from your WordPress installation when you click “Deactivate” on the WordPress plugins panel. I’ll also add that clicking “Delete” on the WordPress plugins panel performs the same task without the need for the box to be checked.
I initially didn’t have an uninstall script to run when someone clicked “Delete” and instead relied on this option to clean up after the plugin should someone wish to deactivate and delete. I’ve since added the uninstall script making this option somewhat unnecessary. However, it may be used to reset the plugin without having to uninstall and reinstall. I myself use it for this purpose often during testing. I will likely replace this option with simply a button to reset the plugin to default state.