The game becomes extremely laggy and the server stalls/crashes after a while when certain structures try to generate above y 255 in custom worlds

The Bug

I noticed this when trying to generate a custom dimension that generates a ceiling at y=255 with overworld biomes.
The log was being spammed with errors like these:

[03:51:23] [Server thread/WARN]: Tried to load a DUMMY block entity @ fu{x=-137, y=260, z=13} but found not block entity block Block{minecraft:air} at location
[03:51:23] [Server thread/WARN]: Tried to load a block entity for block Block{minecraft:air} but failed at location fu{x=-137, y=260, z=13}

Note how y is above the world limit.
In this particular case, when going to that location, it appears like a village tried to generate at this location.
Changing separation and spacing to 4095 and 4096 for villages seemed to solve the issue. I am not sure if other structures might be affected as well.

How to Reproduce

1. Generate a world spawn with the following preset: overworld_ceiling_255-1.json
2. /execute in buggy:game_breaking_experience run tp @s 752 256 -208
   → The game gets extremely laggy