VS Code not recognizing Docker in WSL - docker

Question

I was previously able to run Remote Containers inside VS Code without any errors. For some unknown reason, today it stopped working with this error when I try to reopen in a container. Error is: Docker Desktop WSL 2 backend required.
In the Windows Powershell, I can see that docker is indeed installed.
PS C:\Users\Me> wsl docker --version
Docker version 20.10.14, build a224086
I tried to reinstall and follow the instructions in Docker Desktop WSL 2 backend setup.
Use WSL 2 based engine is checked
Integration with the Ubuntu distro is enabled
Inside the Ubuntu command line, I can also run docker ps with no problem at all.
It's just inside VS Code that's having issues. Here's the trace log to help out more:
[1491047 ms] Host server: Error: spawn /usr/local/bin/docker ENOENT
at Process.ChildProcess._handle.onexit (node:internal/child_process:282:19)
at onErrorNT (node:internal/child_process:477:16)
at processTicksAndRejections (node:internal/process/task_queues:83:21)
[1491049 ms] Start: Run in Host: /usr/local/bin/docker version --format {{.Server.APIVersion}}
[1491049 ms] Host server: (node:3238) PromiseRejectionHandledWarning: Promise rejection was handled asynchronously (rejection id: 1)
(Use `node --trace-warnings ...` to show where the warning was created)
[1491051 ms] Host server: Error: spawn /usr/local/bin/docker ENOENT
at Process.ChildProcess._handle.onexit (node:internal/child_process:282:19)
at onErrorNT (node:internal/child_process:477:16)
at processTicksAndRejections (node:internal/process/task_queues:83:21)
[1491052 ms] Stop (3 ms): Run in Host: /usr/local/bin/docker version --format {{.Server.APIVersion}}
[1491052 ms] spawn /usr/local/bin/docker ENOENT