With my current card, I'm given the ability to similuate surround sound with regular stereo headphones but, in that case, would I need to set in-game settings to 5.1 or headphones?
I would think headphones/stereo, because the simulated surround sound will take stereo/headphone output and make it seem as though it is 5.1, even while still being 2.0. If you set your game to 5.1, it will output it as if there are five speakers, so you won't hear most of the sound because the majority of the sound comes through the center speaker, which you obviously don't have on headphones.