Don't worry - it isn't.
The diameter of the gasket is intentionally larger than the lid channel it inserts into. Let's just say we tested a large number of different lengths and we got the best results with a slightly longer / bigger gasket.
When they are too small they have a tendency to pop out especially when lubed and wet. There can't be any tension on the gasket pulling to the inside, so when they are slightly bigger if anything they push OUT to the edge of the lid and stay snug in there.
Thousands of these lids have been made and in use - so never fear, it's all good!
The guys at Kegoutlet.com have a good video hosted up on their site that shows proper install and orientation of the lid gasket - check it out: