The 23-year-old looked set to miss out on a Wembley appearance after talks between the two clubs apparently broke down following his return to The Hawthorns earlier this week.
Albion chairman Jeremy Peace said: "I am delighted for all parties concerned - and particularly Luke - that we have been able to come to an agreement.
"We have always been happy for Luke to go back to Barnsley and play in the semi-final - providing the deal was right for us.
"We felt we were a big help to Barnsley by allowing Luke to join them for a month and heavily subsidising his wages.
"Now Barnsley's financial situation has changed due to their lucrative FA Cup run, we have managed to strike a deal which suits everyone.
"Luke was third-choice goalkeeper here and unlikely to get first-team football. He has now got a chance to play regularly and we wish him every success at Barnsley."
West Brom have inserted a 50% sell-on clause in the deal that will eventually take Steele to Oakwell on a permanent basis.
However, under present Football Association rules, Steele would not be able to play against the Baggies should Barnsley and West Brom reach the FA Cup final in May.