If you put the transfer case in neutral, you should be able to tell if the hubs are engaging or not. The transfer case is put into neutral with the transfer case shift lever, and it shouldn't matter whether 2wd or 4wd is selected by the button. If your hubs are locked you should not be able to...
I'm a little confused. Is the 4wd light now always on? or does it turn on and off when you press the button?
Please report on the following tests with all 4 wheels on the ground.
Front hubs unlocked, 4wd off, transfer case in High, you should be able to turn the front drive shaft by hand...