Having signed him while Blackpool manager, he re-signed him on loan until the end of last season when he moved to south London.
Phillips went on to play a vital part in Palace's success and scored the goal that secured promotion via the play-offs at Wembley.
"The last two seasons I have said that's it, but I have had an incredible couple of years," he said.
"Working alongside Ian, he has faith in me and I said after the final there are not many managers that would give a player touching 40 as many minutes as he gives me.
"You can only do that if you produce the goods for him. I still feel I can do a job and he wouldn't have signed me otherwise.
"I am delighted my future has been sorted out for the next season and I am really looking forward to get going."