A drain plug warning system includes a first member that can be attached to a transom or other wall of a watercraft and a second member that is shaped to be received within an aperture that is formed through the first member. To drain water from the watercraft, the drain plug or second member is removed from the aperture of the first member, and water is allowed to drain through the aperture. If the second member is not replaced within the aperture to a predetermined location relative to the first member, a magnetically sensitive component near the aperture assumes a state that will cause an alarm under certain predefined conditions such as when an operator activates a key switch mechanism of the watercraft. The magnetically sensitive component can be a Hall effect element or other magnetically sensitive component. The actuator in the second member can be a permanent magnet, but other embodiments of the system could utilize a ferromagnetic material in the second member combined with a biasing magnet associated with the magnetically sensitive component near the aperture.