Ran in to this over the weekend and after a lot of work figured it out, thought 
I’d summarize here in case others run in to the problem they can save some time.

Problem: Apple watch suddenly stops authenticating on the Mac

Solution, execute the following steps.

1. enter system preferences and uncheck unlock with apple watch.
2. exit preferences
3. disconnect from WiFi using the disconnect option available by holding 
command when opening the WiFi pulldown.
4. Reconnect to WiFi by selecting the SSID.
5. Open system preferences and select unlock with Apple watch, make sure you 
wait until the turning on option disappears.

That should do it.

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