Thanks for putting my mind at ease! It seems like there are people who say it goes inside the sponge and others say it goes above. There are a few bubbles on the sponge itself, they don't seem to be coming out of the sponge though..they're just hanging out on the sponge.
I feel so bad for my poor betta, Cesar. I can't believe how much stuff accumulated under that UGF I had, despite my often vacuuming. Now that my gravel vac can actually reach the bottom of the tank with no UGF in the way, I'm hoping it'll never be that bad again. No wonder his fin rot hadn't been clearing up even with upped water changes.
Either way, I'm sure this will be a better filter for him : ). Good luck with the plants! I'm sure they'll do great. I've been slowly adding more plants to my tank, it takes serious self control not to turn the tank into a full on jungle!