The team confirmed the deal Friday. According to a source, the deal is worth $3.75 million, with Holmstrom earning $2.25 million next season and $1.5 million the year after.
The 37-year-old Swede has been with the Wings since 1996, helping them win four Stanley Cups with his hard-nosed play in front of the net.
He finished with 25 goals and 20 assists in 68 games with the Red Wings last season, his 13th with the team.
Information from ESPN.com's Pierre LeBrun and The Associated Press was used in this report.