Above screenshot is in software mode.
It clips into the water on hardware mode with varying depth depending on the 'adjust sprite clipping' setting. (maybe it's not actually floor clipping into the liquid and that's just the 'adjust sprite clipping' effect)
Now what is interesting, is I have a custom terrain defined with a deep 32 units of depth. This is used in black areas to hide the corpses of any flying enemies that may land in it.
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You would expect the demonchunk bits to be submerged completely, however they show the same clipping behaviour as regular water? (or is that just the 'adjust sprite clipping' setting taking effect? Really strange.
EDIT: pictures are better than words.
Both of these below were taken in hardware mode with 'adjust sprite clipping' set to 'Always' When set to never, the chunks clip into all floor surfaces regardless of the terrain.