How did you go about setting up the mailmerge main document.

Starting with a formletter type mailmerge and then adding an envelope to the
document via Tools>Letters and Mailings>Envelopes and Labels>Envelopes>Add
to Document, and inserting merge fields from the data source to both the
Envelope and the Letter, then executing the merge to a new document created
envelope, letter, envelope, letter etc for me.