Can't find a source right now so I'm going by memory;
It's a region / layer were the temperature of the water changes rapidly compared to the water above (and below?) it. Say the water from the surface to 80ft depth drops 5deg in temperature, and then it changes another 5deg in the next 10ft (80 to 90ft depth), then that 10ft of water would form a "thermal layer".
What it does is reflect or refract sound (and possibly other forms of energy?). This happens because the speed of sound traveling trough water is (among other things) dependent on the temperature. As the sound reaches the layer, it's speed changes, and as a result it's direction changes. It's a lot like light bending as it enters water; if you look at an object from above the surface, it appears to be in a different location then it actually is.
I think if the sound hits the layer at a very shallow angle, it is actually reflected. I think I read sometime that if the surface if perfectly smooth (0 wind), sound gets reflected back and forth between the surface and the layer, allowing anyone listening to pick up on a contact from very long ranges.
So, a sonarman listening for a passive contact or using active sonar for location, would place the contact in the wrong location (due to refraction) or would not be able to acquire a contact at all (due to reflection).
I doubt it is this accurately modeled in the game. Probably all it does is make you a bit harder to detect, by reducing the range you can be detected at under the current conditions.
Anyone please feel free to correct me, it's been a few years since I read about this stuff.
* found something on refraction, also talks a bit on sound refraction (the acoustics bit):
http://en.wikipedia.org/wiki/Refraction