Terms of the deal were not originally disclosed, but McMillan later confirmed both parties agreed to a one-year extension.
"I just felt that that was appropriate for both sides," he told ESPN's Eric Woodyard. "Normally I don't do any negotiations until after the end of the season. This has been an unusual season for all of us - myself, the organization, the NBA."
McMillan, 56, had one year remaining on his current deal, according to ESPN's Adrian Wojnarowski.
After three seasons as an associate head coach, the Pacers promoted McMillan to head coach in 2016, replacing the outgoing Frank Vogel. He guided the Pacers to a 42-40 record in his first season, finishing seventh but losing to the Cleveland Cavaliers in four games in the first round of the playoffs.
McMillan currently boasts a combined 181-136 managerial record with Indiana. He has taken the Pacers to the postseason every year and is set to do so again this season.
"What Nate has done in four seasons with our franchise merits this extension," Pacers president Kevin Pritchard said in a statement. "Between injuries and changes in personnel, he and his coaching staff have adapted and produced positive results. He also represents the franchise, the city, and our state in a first-class manner."
McMillan previously served as head coach of the Portland Trail Blazers (2005-12) and Seattle SuperSonics (2000-05). The former guard also spent his entire 12-year playing career with Seattle from 1986-98.