When you configure the Computer Configuration / Administrative Templates / Windows Components / Terminal Services / Sessions / Set time limit for idle sessions group policy in your domain, idle sessions are NOT disconnected.
The Set time limit for idle sessions group policy only works on Windows XP computers that have Fast User Switching enabled. The policy will NOT work in a domain environment.
NOTE: If you use Fast User Switching to establish a non-console session and establish a remote desktop connection to it, the Set time limit for idle sessions group policy works.
NOTE: On my Windows XP Service Pack 2 clients, the policy is named Sets a time limit for active but idle Terminal Services sessions.