This article seems wrong to me. I don't know a ton about the iPhone's specific implementation. That said, I was under the impression that these systems all worked similarly to the PC's TPM. Essentially, the encryption key is stored in a chip that acts as a black box. That chip is manufactured in such a way that makes it extremely difficult to extract data from. You can't simply copy it. You'd have to take it apart, inspect it with a microscope, and hope you don't destroy the data in the process.
The OS should set the security level initially. The TPM would enforce it. You can't modify the OS to make an attempt without it counting against the initially configured limit.