It describes a person who has "tuned in, turned on and dropped out." In other words, it describes a person who has submerged themselves so much in the Counterculture (fully embracing a wide range of drugs- particularly psychedelic drugs, communal lifestyles, anti-materialism, radical politics, anti-authority and particularly anti-Police attitudes, alternate codes of dress and personal hygiene and often anti-social behaviors), and is thus "so cool," that they are largely unfit for and unable to participate in conventional society.
The phrase was invariably complimentary.
More recent usages tend towards extreme forms of irony. Often applied with considerable sarcasm as a form of insult it generally means a person who is deemed to have an inflated self-image. If the person displays any actual Countercultural leanings, they tend to be of the most mild possible variety.
"That kid didn't come to my party. What does he think he is, too cool for school?"
2. Believing that you know everything to the point to where it can harm you or work against you.
3. To be too smart for your own good or too smart by half, meant either literally or ironically.
4. To be in a state in which you think you’re better than anyone else in general.
NOTE: AS AN IDIOM, IT IS SARCASTIC.