I totally agree that it’s strange — I could write a whole separate article about how unreasonable I think this system is.
When I brought up the double taxation issue to my HR representatives, their response was that our defined benefit would be calculated to account for the fact that we were previously taxed on our contributions. So perhaps our defined benefit formula is more generous than is typical, to make up for the fact that we’re being double-taxed? Either way, we’re being taxed on those contributions and then we’re also having the standard amount of tax withheld from our paychecks. I set our withholdings quite high, so we still got a sizeable return this year — just not as high as it would have been if I’d done my homework and accounted for the extra $7K.