How does the Assault Rifle Piercing Mod work?

Any projectiles which benefit from the piercing (in this case, penetrate a .5 meter thick object) will deal reduced damage (60%). Projectiles which don't need to penetrate cover or an obstacle to hit their target do normal damage. This includes the visual armor that Husks / Cannibals can get, and the shields of Cerberus Guardians.

Additionally, depending on the type of enemy and the difficulty, some enemies have "Armor" (not to be confused with the yellow Armor bar some enemies have on top of / instead of health). This armor reduces damage by a flat amount, and it is this Armor that the piercing mod works against. So you do get some benefit when attacking all colors of health bar.