The deal also includes a no-trade clause.
The 29-year-old defenceman from Calgary earned $2.2 million this season while posting career highs in goals (8) and points (26), logging an average of 22 minutes 21 seconds ice time while appearing in all 82 games.
Phillips has spent his entire 10-year career with the Senators, who drafted him first overall in 1996. The six-foot-three 216-pounder was an assistant captain this season and served as captain for five games when Daniel Alfredsson was injured.
In nine NHL seasons, Phillips has 40 goals, 124 assists and 456 penalty minutes in 618 regular-season games.
On Tuesday, the Senators announced the signing of defenceman Anton Volchenkov to a $7.5-million, three-year contract.