This code works fine:

-------->8-------->8-------->8-------->8
use XML::Twig;

$twig=XML::Twig->new(#keep_encoding=>1,
                     twig_handlers=>{
                     '[@a]' => sub {warn "a handler\n"},
                    });
$xml=join ('', <DATA>);
$twig->parse($xml);
__DATA__
<?xml version="1.0"?>
<!DOCTYPE doc SYSTEM "dummy.dtd">
<doc>
  &ent1;
  <elt1 a="Y"/>
</doc>
-------->8-------->8-------->8-------->8
and generates:
a handler

However, if the keep_encoding is uncommented, then it produces this error:
Can't use string ("ent1") as a HASH ref while "strict refs" in use at /local/share/oed/lib/perl/XML/Twig.pm line 1251, <DATA> line 6.