The plugin is indeed compatible. I’ve added specific support for CDN rewriting for W3 Total Cache and plan to add support for others as well.
The reason for using an iframe is to prevent your HTML pages being cached offline. Once they’re in appcache it’s very difficult to remove or update them so you don’t want that.
The iframe contains no actual content, just the manifest reference on the HTML tag. I can’t see how it could possibly have a negative effect on SEO. In fact page speed is taken into account for SEO now so it should help if anything.
To test that the plugin is working you can view the developer console in Chrome for example by hitting f12, then under the network panel you can see which assets are delivered ‘from cache’. You can also browse to chrome://appcache-internals to see what content sites are storing in appcache.
Lastly compare the speed of a few page loads using appcache and then again without. The biggest advantage is that it speeds your site up for returning users on slow connections in particular.