[Ken Bergen]

The diaphragm opens like a bellows to follow the fluid as it leaks out and usually can be manipulated back to it's original shape.
If it's truly fubared a new one is only about $15.00 at your local dealer.

And yes it can be a PITA to get the cap on over the diaphragm.

 

[Ken Bergen]

So the fact that the top of the gasket is bigger than the master is okay?

Nope, the diaphragm should fit into the recess on the top of the reservoir. Once the plastic plate and cap are on you should not see it.

 

[Ken Bergen]

Well the cap goes on which is good but now you have to finger out why it leaks down.
It could be a leaking slave cylinder or a leaking master cylinder.