Are you creating animated buttons using the Encore video thumbnail? Or are you trying to get a static image to show in the menu? What I say next may confuse things if you are after a static image.
You can link a timeline as you describe, but I think you will avoid some confusion by using Josh's method.
You can't drop a poster frame into a video thumbnail button. Encore gets the video for the thumbnail from the timelione the button is linked to, starting at the timecode you designate as the poster frame - it is not really an image, but a timecode. When you drag an image onto the button, Encore probably tries to use it, but doesn't, but when the menu is rendered for the build, it then uses the thumbnail animation.