I normally use 1.5 quarts of water per pound of grain in my mash. So for me, I'd use more like 3 gallons of water in the mash.
With 4 gallons and 8.5 pounds of grain, you'll have a thinner mash. No problem if your mash pH is good.
8.5 pounds of grain will absorb about 1 gallon of liquid in the mash, so you should get 3 gallons of wort from that.
My boil volume in a 5 gallon batch is 7 gallons so I'd need to sparge with 4 gallons.
Since you're going to be getting out about 3 gallons from the mash, instead of calculating it, you can just plan on using about 3-4 gallons of water in the sparge and just sparging up to your boil volume.
I would be concerned about oversparging with a 8.5 grainbill, though, so make sure you check your sparge runnings near the end and stop when you get to 1.010 or below.