Jaydee:
I understand the 2" restriction you have
To be able to use an O-ring, then increase the size of the raised area on the block and the step on the lid. The attached modified picture shows what I mean (and what Brad mentioned too).
With the O-ring being on the side of the step, sealing should be even better than an O-ring on top. It only adds 1/4" to the block height (with your minimum 1/4" needed for doing the O-ring).
Brad:
You could make the top out of 2 flat pieces, but I was thinking of simply making it out of one piece and milling the "rim" around the edge
You could use the same sealing method for your max'd out block you have attached a few posts above too.