You do want to either replace or isolate that washer or it could impart enough iron into the wort to be tasted. If replacing, get at least 304 grade stainless, with a preference to 316.
You don’t have to replace though. You can coat the rusting metal with silicone seal rubber. Don’t worry about the heat rating since you aren’t placing the rubber under a physical stress. I do recommend using food-grade material and not using the heat-resistant type of the silicone seal. I’m pretty sure the heat-resistant stuff isn’t food-grade.