This seems more like a bug with MEncoder than anything else. PMS just tells MEncoder which video file to transcode using which external subtitle file. If MEncoder handles internal and external subs differently, then there's not much we can do until it's fixed in MEncoder.
You can try updating MEncoder to see if that's been fixed. If it has, then the build in PMS can be updated.
You can try using a different transcoding engine (like FFmpeg).
If you want to debug it further with MEncoder, try adding flags to the existing transcoding command PMS uses - viewtopic.php?f=6&t=3507&p=78300#p78300
To note, this should be the same as using the custom options field within PMS, but this will let you isolate the issue to just MEncoder.