Depends are you 1. Using ATV1 or ATV2?
If using ATV1, then that using the ATV preset, that would be correct 960X400
If your using a ATV2, first make sure your using HB 0.9.5(newest version) and then use the ATV2 preset which will do 1280X720 resolution.
FTR, ATV1 can handle a 1280 x 720 file perfectly well (open the picture settings window, change the anamorphic setting to "Custom", and then set the width to 1280 and the height to 720). I do this all the time.
On a few occasions, the bitrate of the resulting file gets a little too high for the ATV1 - usually when the source picture is grainy, e.g. Saving Private Ryan or The Hurt Locker (or, strangely, anything in black and white) - and you'll know this because your encoded file simply won't sync or stream to your ATV (you can use MediaInfo to check the bitrate of your encodes). When this happens, use the same settings in Handbrake but back off the bitrate a little, and try again. Normally only a notch or two on the bitrate slide is enough to get a file that will play on your ATV.
Oh, and I swear that the three HD encodes I've done on 0.9.5 look distinctly better than any I'd done before - even on a recent nightly build!