Help replacing '86 300E distributor cap - where does the O-ring go???

[mwaller]

I bought some maintenance items for my wife's 86 300E, including a new set of wires, distributor rotor, distributor cap, and distributor cap O-ring seal.
When I removed the old cap last night, there was no O-ring anywhere.
The new O-ring I bought appears to be sized so as to fit in the bottom of deep circular groove on the mating face of the new cap. Is that where it goes? I'm concerned that in that location, it won't allow the cap to sit down all the way on the backing plate... does this matter?
As you can see, I'm a newbie at this. Any help would be appreciated.
Thanks!
Mika