Using a project based on the Simple template, which by default does
not have the Wefect WI type selected as a top-level plan item type,
why is it that I can create a new Defect, save it, then drag and drop
it onto "Top Items" folder in a new iteration plan? The
description in the process editor says "This configuration
option allows you to specify which work item type should be
considered as top-level plan item in the Iteration Plan
editor."

The folder structure in the iteration plan editor is not strict. For the
initial population of the "Top Items" folder it uses the top-level plan
item property, but you are free to drop any work item onto it.

Top-level plan items are merely used to have different presentations and
progress computations. For instance, instead of an estimate control,
the plan editor shows a progress bar for top-level plan items. This is
because we assume that top-level item usually describe an idea and track
progress on its implementation whereas the actual work is distributed
onto child tasks.


--
Cheers, Johannes
Agile Planning Team