Hypothetically, my RTH altitude is set at 200 feet and I'm close to the side of a hill about 400 ft high.  If I go RTH for whatever reason will the drone immediately drop and try for the 200 ft RTH altitude  (and crash) or is it smart enough to pull away before dropping to the prescribed 200 ft?  

Your drone will climb to the set RTH height if it is lower than the RTH height.
But if it is already higher, it will stay at that height to RTH.
It won't ever descend to the set RTH height.

And all heights, including the RTH height are relative to the launch point.

Page 15 of the User Manual explains this.

Hi, ELW. Thanks for reaching out. As Labroides mentioned, if the current altitude of the aircraft is less than the RTH altitude, it automatically ascends to the RTH altitude first. If the aircraft's altitude reaches or is higher than the RTH altitude, it will fly to the Home Point at its current altitude. For more details, you may check the User Manual (page15). Should you have further concerns, please reach back here at DJI Forum. Thank you, and have a nice day.