I am assuming its a bug, I had the same issue with version 1.101 of vscode, I was able to ssh through my terminal but vscode was failing. It wasn't happening for all of my servers so I am assuming that the problem happens with something specific in those servers which makes the problem more complicate I guess?. I tried many suggestions from github and an older question here but non worked, I even reinstalled vscode from scratch but nothing was working. I installed an earlier version (1.99.3) and that fixed it and I can ssh now with no issue.