Adding: the server and client had to both be running vis patched maps to be able to see other players in the water due to the way entity visibility was calculated server-side.
The downside to running vis patched maps on a server is it used slightly more CPU than unpatched maps IIRC. Perhaps someone that ran more servers than I did (I ran two nodes on an Intergraph InterServe with dual P6-200s) could weigh in on what the impact was at scale.