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It restarts a slot that you can use to put any character in.
EX: Lvl 34 Engineer can be removed and replaced with a new Rifleman which will reset the engineer and lose his progression.
Yes. You basically make room for another class by deleting one that's taking a spot. I know this because I reset my engineer class when I thought the progression tree wasn't allowing me to pick the items from decision points and I had to lvl up all the way again to get to the lvl I was and pick the weapons I chose before.
I wouldn't recommend doing this since it's been announced that you will be able to reset (respect token wthout the use of tokens) your classes to make different choices on the progression tree.