1 Good
2 With multiple tentacles, I want say it's a spaghetti worm. Most of this type of worm are very beneficial to the biosystem.
3 The small polychaetes that live in the substrate form a diverse group, one that is probably different in detail in each aquarium, but also one that has general similarities in each system. These worms act to break down, utilize, and mobilize organic materials. In doing so, they move excess chemical energy and biological nutrients through the system, eventually allowing for the export of these excess materials. The food, or energy and materials, that they eat goes to make more worms and, in the process, some of the material is released as waste material, gases, or soluble nutrients which may be either exported from the system or recycled even further.
PS: As time goes by, you should start seeing the area around the burrow turning a greyish color. This is the mucus the worm secrets to help it slide through the "tunnel".