Balbuena was sent off late on at the London Stadium after catching Blues full-back Ben Chilwell with his follow-through having cleared the ball.
In real-time, referee Chris Kavanagh did not even award a free-kick for the incident but was told to consult the pitchside monitor by the VAR official and decided to send the Hammers man off.
Irons boss David Moyes called it a “really rank, rotten decision”.
“I think it’s a decision made by somebody who’s never played the game,” the Scot added. “I don’t know where Fabi Balbuena is supposed to plant his foot.”
The successful appeal means Balbuena will be available for West Ham’s trip to Burnley on Monday.
The defeat to Chelsea saw Moyes’ side lose the initiative in the race to finish in the top four.
They currently sit fifth, three points behind the Blues, with five games to play.