I store only secrets in encrypted form, so I never had to merge anything. But I'd assume merging should be unaffected because it happens in the work area, i.e. in decrypted form. That it's a different storage format in the repo should not matter.
You might only want to keep the files secret from the broader internet, rather than a (trusted) forge, which can make the unencrypted secrets available via an UI for eg. authenticated maintainers.
These cases would benefit from being able to see the secrets transparently in the UI when logged in.
Also, forges having access to e.g. deployment secrets is not that uncommon (e.g. GitHub with deployments via GitHub actions).
I think this pattern was common for things like Ansible and Terraform configs and dotfiles.
My point is, don't use an end-to-end encryption scheme if you want more than the ends decrypting it.
Don't trust private repos to be private!