Small RNAs, coupled with Argonuate proteins (AGOs), regulate diverse biological processes, including immunity against nucleic acid parasites. C. elegans possesses an expanded repertoire of at least 19 AGOs functioning in an intricate gene regulatory network. Despite their crucial roles, little is known about the regulation of AGOs, and whether their expression levels, tissue specificity, and functions change in response to genetic perturbations or environmental triggers. Here, we report that PALS-22, a member of an unusually expanded protein family in C. elegans, acts as a negative regulator of antiviral RNAi involving the RIG-I homolog. The loss of pals-22 leads to enhanced silencing of transgenes and endogenous dsRNAs. We found that PALS-22 normally suppresses the expression of two AGOs, VSRA-1 and SAGO-2, which are activated by bZIP transcription factor ZIP-1. When pals-22 is eliminated, vsra-1 and sago-2 are upregulated. These AGOs in turn play key roles in defense against foreign genetic elements and intracellular pathogens, respectively. Surprisingly, while in pals-22 mutants immune genes functioning in the intracellular pathogen response (IPR) are upregulated, removing SAGO-2 or the RNA-dependent RNA polymerase RRF-3 in these mutants leads to the downregulation of these genes. This observation contrasts with the typical gene-silencing role of siRNAs. Finally, by analyzing C. elegans wild isolates and lab reference strains, we demonstrate that PALS-22 regulates the expression of several germline AGOs, affecting germline mortality and transgenerational epigenetic inheritance. In summary, PALS-22 is a key genetic node that balances the trade-off between immunity and germline health by modulating the functions of different AGOs, thereby shaping the outputs of the RNAi machinery and the dynamics of epigenetic inheritance.