Does TimeMachine backup iCloud Drive files?

iCloud Drive is a folder located in the Library folder: ~/Library/MobileDocuments.

This folder will be back-upped but there are a few strings attached to it:

• As long as the files are stored locally it will be backed up.
• When there is a cloud icon next to the file it means it's stored in the cloud and not longer locally. It will not been backed up.

Yes, it does. Technically, the iCloud Drive folder is located here:

~/Library/Mobile\ Documents/com\~apple\~CloudDocs

with ~/Library referring to the (hidden) Library folder inside your user home folder. As Time Machine backs up all of the user’s home folders (except for some standard exclusions like Caches) it will also back up your iCloud Drive.