This setting has nothing to do with the question the OP did
If passwords are synced between devices, they are presumably being stored on MS servers.
That's not what they were asking. They were asking about if TYPED passwords are sent (meaning keylogger style). You're talking about password manager syncing.
To just give one example, if typed passwords are sent them passwords typed into Chrome are sent, if only the password manager is synced then that only impacts IE or Edge users.