Let me guess, when you try to select "Use your Apple Watch to unlock apps and your Mac", it reports "unable to communicate with Apple Watch" even though it is on your wrist, unlocked, and all the numerous system requirements are met. Everything was working fine, then you upgraded macOS and it stopped working. Is that correct?
For reference, please review all the steps in Unlock your Mac with your Apple Watch - Apple Support including "How to set up Auto Unlock." Then, confirm you already tried the three steps under "If you need help."
Specifically these two (emphasis added):
- On your Mac, open System Settings (or System Preferences) and turn off the Apple Watch setting described in the previous section.
- Restart your Mac.
- Turn the Apple Watch setting back on, ...
If you exhaust every possible solution in that Support document and it still isn't working, I suggest you forget about it for at least 24 hours. Because that's what I did, and a day or two later it just started working again. I did nothing.