The 56-year-old returned to United in December as part of Ole Gunnar Solskjaer’s backroom team.
Phelan, who was sacked as Hull City manager in 2017, had most recently held the role of sporting director at Australian side Central Coast Mariners.
He served as Sir Alex Ferguson’s assistant from 2008 to 2013, having been a first-team coach since 2001.
“Manchester United has been a huge part of my life since I joined as a player in 1989 and I am delighted to be able to continue that relationship in this key role,” said Phelan.
Solskjaer said Phelan had been “invaluable” to him, adding: “I’ve been a player under him, his knowledge, experience, demeanour, everyone in the club enjoys speaking to him, talking to him, discussing football with him, players really respect him, they know what he can do and he’s worked with the best.
“I’m very pleased they’ve finally agreed. When Ed (Woodward) rang me [in December], he [Phelan] was my first port of call to assist me and we’re here now for a few years together.”
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