[BUG] Max plan, <20% usage, persistent rate limit error in VS Code for 24h+

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

Title: Persistent "API error: rate limit reached" in VS Code despite Max plan with <20% daily usage

Body:

Environment
OS: Windows 11 Home 10.0.26200
VS Code version: (fill in — Help > About)
Claude Code extension version: (fill in — Extensions panel)
Plan: Max (Claude)
Description
The Claude Code VS Code extension has been showing API error: rate limit reached continuously for over 24 hours. My daily usage is under 20% according to the Anthropic dashboard.

What I've tried
Waited 24+ hours — error persists
Disabled and re-enabled the extension, fully restarted VS Code
claude logout → claude login
Confirmed API key is valid and billing is current
Additional context
Claude Code works normally in the terminal CLI during the same period
Only the VS Code extension is affected
No changes were made to settings or API keys before this started

What Should Happen?

?

Error Messages/Logs

API Error: Rate limit reached

Steps to Reproduce

1. Open VS Code with Claude Code extension installed
2. Attempt any interaction with Claude Code in the VS Code extension
3. Receive "API error: rate limit reached" immediately
4. The error persists regardless of waiting, restarting, or re-authenticating
5. Running claude in a separate terminal (CLI) works normally with the same account

Claude Model

None

Is this a regression?

Yes, this worked in a previous version

Last Working Version

_No response_

Claude Code Version

v2.1.77

Platform

Other

Operating System

Windows

Terminal/Shell

Terminal.app (macOS)

Additional Information

_No response_