Can anyone think of any reason why this flag should be kept? These days, NeoLemmix automatically applies only-draw-on-terrain to one-way arrows; outside of that, the only use cases I can think of for it are invisible objects (which is better served by the actual "invisible" option, which doesn't draw the object at all rather than taking the time to attempt to draw it, and finding every pixel doesn't need to be drawn), or in very rare cases for graphical effect, the only case I can think of being Fun 20 / Mayhem 7 of Orig (those who've only played the DOS version won't know what I'm referring to here - try the Amiga version (which the NeoLemmix version is also based off) and you'll see what I'm meaning).
It's possible I've overlooked something, so feel free to point this out if I have. But otherwise, I'm thinking it's time to drop that option.
EDIT
Also we may as well call two other options into question here - "Invisible" and "Fake". These do have a bit more use - yes, it is possible to use them in ways that would be "bad level design", but the way I see it, that does not in and of itself justify removing a feature. At any rate, these could be worked around by simply creating new objects that have no effect (or an effect but no graphic). This means that removal of them merely makes acheiving the effect less convenient. However, it would still be somewhat of a deterrent to bad level design - especially for the type of people who think "hey, there's an option, I MUST find a way to use this no matter how bad the resulting level is!".
One case I can think of where a single level uses both fake and invisible objects to interesting effect is "It's Opposite Day!" from Lemmings Plus IV. This level contains a fake window on the left side and a fake exit on the right side. There is then an invisible window where the visible-but-fake exit is placed, and an invisible exit (actually, several of them, to give a larger trigger area) where the visible-but-fake window is placed, giving the level its theme of opposites - as from the user's point of view, the lemmings spawn from the exit, and must reach the entrance.
EDIT: The decision has been made to not remove any of these options.