Hoffman, who turns 42 next week, had 37 saves and a 1.55 ERA with the Brewers this season, pushing his career saves total to 591, the major league record.
Hoffman will earn $8 million next season, and Hoffman and the Brewers will share an option for another deal in 2011.
Doug Melvin, the Brewers' general manager, raved about Hoffman's work ethic and leadership this season, saying that he viewed Hoffman as the Cal Ripken of pitchers.
A formal announcement is expected later this week. Hoffman told reporters in St. Louis on Sunday that he was talking with the club about a new contract, so Melvin's quick move to re-sign Hoffman was no surprise.
In doing so, Melvin has quickly addressed two of the team's pressing offseason concerns by stabilizing the closer's role and retaining manager Ken Macha for next season.
Hoffman said often during the season that he wanted to return to Milwaukee because he liked his young teammates' positive attitudes in the clubhouse.
He also said he liked his new role, no longer having to be the face of the franchise like he was for most of his 16 seasons in San Diego.
"I wanted to be a piece of the puzzle, another cog in the wheel, all those cliches," Hoffman told The Associated Press earlier this season. "They have a lot of young guys that are that face and that wasn't going to be any of my responsibility."
Now, Melvin will need to focus on finding more quality starting pitching in an effort to give Hoffman additional save opportunities.
Hoffman had his lowest ERA in 10 years this season and made his seventh All-Star Game appearance, filling in for injured Dodgers closer Jonathan Broxton.
While the Brewers didn't announce Hoffman's new contract, the team provided several injury updates.
Left-hander Manny Parra will undergo surgery on his left shoulder and infielder Casey McGehee will have arthroscopic right knee surgery on Tuesday. Right-hander Braden Looper is scheduled to undergo surgery on his right knee next week.
Buster Olney is a senior writer for ESPN The Magazine. Information from The Associated Press was used in this report.