"Unable to Communicate With Apple Watch" when trying to enable "Unlock with Apple Watch" when using a face mask

I have seen a couple of posts, but none of the solutions work for me. When I try to enable to "Unlock with Apple Watch" option to unlock my iPhone while wearing a face mask, I keep getting an error saying "Unable to communicate with Apple Watch" as shown in the attached screenshot.

This has become very frustrating. I have my Watch turned ON, it's on my wrist, it's unlocked, and it does have passcode enabled.

My device information is below.

iPhone 12 Pro - Model MGMN3LZ/A - A2407, running on 14.5.1

Apple Watch Series 4 - Model MU6L2LZ/A - A1978, running on version 7.4.1

Things I have tried:

• Soft-restarted both devices
• Hard-restarted both devices
• Turned Airplane mode ON and OFF on both devices
• Turned Bluetooth OFF and ON on the iPhone
• Turned WiFi OFF and ON on the Watch
• I've closed all running apps too, on both devices

My iPhone most definitely is able to communicate with my Apple Watch, as I am able to take phone calls, use text messages, ping my iPhone from my Watch, etc. Also I can unlock my MacBook Pro just wearing my Watch.

I don't want to have to go through removing (unpairing) my Watch and having to pair it again, hopefully, that'd be too much of a hassle and I don't even know if it would work. Is there anything else I can try?

Thanks for any help you might be able to provide.