might be a better alternative to handbrake it's actually simpler in some ways.
1) Select open video file and point it at your mkv.
2) Set "Target Audio = Untouched".
3) Set "target Subtitles = Selected" the selected track is the one seen in subtitles section just above.
4) Set "Target Media = MKV crf and set CRF = 18 - considered the sweet spot between image quality and compression, movies should look similar to original at half to or two thirds the size of the original on average but not all movies compress the same with constant quality.
5) Click Add to Queue then Full Recode CRF lastly click start.
That will produce a high quality copy compressed with x264 keeping audio track in place along with subtitles, BDtoAVCHD doesn't crop the video black bars, in fact there is no need to with x264 as there is no penalty.
An advanced option is the speed vs quality setting, this affects the encoding speed the default medium is best left but if you really wanted to squeeze out something extra you can change it to slow or slower at a cost of time of course (I really don't think it's worth it but it's your call).
If you want to stick with handbrake
* high profile preset, mkv container, select auto pass-through, set RF = 18, add sub (you can optionally burn in subs), cropping can be left on or disabled it makes no difference.