This should just work.
What I normally do though is to edit the source paths in the dialog that shows up when it can't find the source...I don't edit the launch configuration directly.
Does that work for you ?
In any case report it in jira with screenshots on how you setup the launch configuration.
You may need to select the folder of the root of the source. For example, if the file is in package com.oxbeef.servlets, do not browse to com/oxbeef/servlets/SomeServlet.java.
Instead browse to the folder directly above com, the overall source folder.