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Yes, that's right. They're in the minors, or on the 15-day DL (but not the 60-day DL). 60-day DL players don't take up a 40-man roster spot.
If a player refuses to be demoted, it's because they have the necessary experience to be able to refuse a demotion. You can tell who those people are because they'll have that "hurricane symbol" by their name (I can't type it on my keyboard). If they can't be demoted without their approval, you have to pick someone else or release them.
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Mainline team
SPTT team
Was not a Snag fan...until I saw the fallout once he was gone and realized what a good job he was actually doing. - Ty Cobb
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