Apple Watch 5 will NOT unlock MacBook Air

Happy to report what fixed it for me, following steps originally posted here https://discussions.apple.com/thread/251803595 by user stoska992, then adding a couple of steps added by others: 

FIRST, this procedure:

Steps (follow at your own discretion)

1. Open "Keychain Access"
2. In "View", enable "Show Invisible Items"
3. Search for "Auto Unlock"
4. You should see a whole bunch of application passwords for "Auto Unlock: XXXX's ..."
5. Select all records and delete (this will reset/disable auto unlock on other Macs if you use multiple Macs)
6. Whilst still in "Keychain Access", search for "AutoUnlock" (no space)
7. There should be 4 entries for "tlk" "tlk-nonsync" "classA" "classC"
8. Select 4 records and delete (don't worry if they re-appear, the system repairs this automatically)
9. Open "Finder" and navigate to "~/Library/Sharing/AutoUnlock"
10. There should be two files "ltk.plist" and "pairing-records.plist"
11. Delete both files
12. Open "System Preferences" and try enabling auto unlock. You may need to enable it twice, the first attempt will fail.

THEN, this command in terminal provided by contributor “isprainedmyuvula” ( …a breathtakingly creative silly handle):

sudo rm /Library/Preferences/com.apple.Bluetooth.plist && sudo shutdown -r now

…Which will restart your Mac.

THEN #12 above again. And just like stoska992 writes, it indeed took the second attempt at checking the box, and out worked instantly!

You are not alone @William Lane. I have been experiencing the same issue, and was informed by Apple Support that their engineers are working on a fix. Apple Support had me upload a bunch of log files. In essence, they have acknowledged this as a bug, and that an update is forthcoming.

This is one of those "golden handcuff" features that once you start using it, it becomes annoying to do without. Now, I'll go work on something more important. :-)