Pretty close taxonomically (same super family, but a different family); this looks to be a
Lobiger sp. that’s missing one of its four “arms” (I’m not at my computer or I might be able to to ID the species).
It’s a Sacoglossan Slug, OP - an algae eater.
The two species I’ve seen diets for (I haven’t looked in depth at these guys yet) suggest that they eat feed on Caulerpa (one specifically
C. racemosa). I don’t know if they
need their specific algae species to survive, or if it’s just a strong preference like with
Elysia spp., which from what I’ve heard will feed on most green algae species in our aquariums.
You’re right about appendages being defense mechanisms - they unfold/unfurl to show off that orange color and make the slug look bigger, and - if they feel threatened enough - the appendages (tentacles) can secrete a sticky substance, detach from the slug (autotomize), and writhe around for while to distract and slow down predators.
Edit: Overall, a super cool find.