Yeah, I think we're talking about the same thing:
(5V - Vforward of LED)/.02 = resistance needed .02 = 20mA. 20mA is max continuous for many LEDs.
Reverse voltage - its just the voltage that can be applied from cathode to anode before the LED breaks down and starts to conduct.
"Also what would happen if an LED had a working voltage of say 3.5v at 40 mA?"
It'd probably be pretty bright! You'd have to use a transistor to control the current thru the LED, 40mA is max for an IO pin, and long term (or maybe less!) will damage the pin.
There is no current limit built if - if you don't limit it externally, it will burn the pin out.