I had to re-enable it after the 10.3 watch update. This is on my personal M1 Macbook Pro running Sonoma 14.3.
The unlock-with-watch feature has limited usefulness to me because I do the vast majority of my work on my employer-issued MBP, which is on a different AppleID. And while I suspect there are many like me with separate AppleIDs for their work and personal devices, it's a use case that Apple doesn't support.