This actually isn't the Black Watch. It's a Black Watch look-alike. The Black Watch is an ABAC tartan, with alternating blue blocks being different (one is like the tartan shown in the pic and the alternating blue block as a pair of double black lines). The tartan shown in the pic is an ABAB tartan, with identical blue blocks. So, yes, the sett is actually 4". If it were real Black Watch, the sett would actually be 8".

As far as the pleating goes, the first option that you show (to the "nothing") won't actually come out "to the no stripe" because the black stripe is narrower than your pleat. So it looks like half the pleat will be blue and half black. It's not particularly traditional, but, if you go this route, be sure to center the color boundary. I think it would be better pleated to the double black line or to the black line in green. Kind of depends on which you like the look of better!

The splits look fine.

Keep us posted with pics!