Can't create folders yet. Per the settings page:
Quote:
Create folders on my Start screen
Folders help you keep the Start screen on your Windows Phone 8.1 organized by letting you group Tiles the way you like. For example, you might have a folder with all your games and another with your favorite apps—it's completely up to you. After you create a folder, you can name it, move it, resize it, and add or remove Tiles from it whenever you want. Your phone might even already have a folder on the Start screen, such as a Music+videos folder.
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It doesn't work, because they forgot to tell us that you need WP 8.1 Update 1 for this new feature. All we have so far is WP 8.1. I had to Google to find out why it wasn't working.