While there are many who feel the show jumped the shark at the end of season 6 or near the beginning of season 7, I believe season 8 is when the writing simply went downhill.
Most of the jokes fall flat, and a lot of the interaction with the four characters is more awkward than usual in this episode.
The thing is, both these story lines were actually promising. Yet once again in this season, the jokes just aren't there. There is good emotional resonance from both the Karen and Will characters, which is nice to see. And the idea that anyone would think that Grace hates gays is a very funny idea, considering every bit of her long speech at the end is true. I give it an "above" for good story ideas, but barely an "average" for the humorless jokes.