(big image)
Levels like this have existed as early as Labyrinth Zone, but levels of this type are Scrap Brain Act 2, Metropolis Zone, Marble Garden Act 1, Ice Cap Act 1, Sandopolis Act 2, and Sky Sanctuary Zone. Sonic 3K just loves its Y Axis. There's a lot of benefits to this type of level design.
No Boundaries: There's no limit to how far levels can go vertically in this scenario. Water zones love abusing this by having endless Y Axis "sections" to simulate a water slide. Other zones may use this because they're a vertical climbing based level (Marble Garden, Sky Sanctuary). This type of level design is also good for maze labyrinths (Scrap Brain 2, Metropolis, Sandopolis 2), as the mazes can become ridiculously complex and difficult.
High Routes, Low Routes, Average Route, How about None: Instead you get every route being the same degree of fun level design no matter where you end up. As said before, Sonic 3 already chunked that concept out the window.
Only one real complication: Which is your problem, not the players problem. The issue lies that the bottom of the levels map must be able to perfectly align with the very top of the level map on the Y axis. This requires some careful planning on your part. I would advise if you're drawing out the layout on paper first, to draw a bit of how the level will flow on the top of the map, at the bottom of the map as well, and vice versa at the top. So basically you're redrawing part of a level twice on the top, and the bottom of the map, so you can know what part connects where. If this isn't giving you a good mental image, just look at how it's done in Metropolis Zone Act 1.
Actually there's another: I have yet to see levels like this in fan games. I'm not sure if there's technical difficulties behind this, but if you're a fan gamer rather than a hacker, you might be out of luck here.
Biggest mechanical limitation is correctly representing objects that are not static on both ends of the loop. That is a functionality that was already integrated into the original genesis hardware that freeware game making suites such as MMF2 will have a hard time replicating due to the level of abstraction. If you don't mind not having ANY possible moving objects near the edges of the loop, there are viable workarounds to everything else... at least, in Game Maker.