The extension will keep Hernandez, already under contract to make $39.5 million over the next two years, with the Mariners through the 2019 season.
USA TODAY Sports and The Associated Press initially reported Hernandez and the Mariners agreed to a new seven-year deal -- that would have started this season -- worth $175 million.
But the deal actually is a five-year extension that will begin in 2015, sources told Olney.
Hernandez will make an average annual salary of $27.1 million over the extension, the highest average salary given to a pitcher in baseball history -- aside from Roger Clemens' $28 million prorated salary in 2007.
The new extension is expected to be finalized before spring training, according to USA TODAY Sports.
Hernandez agreed to a $78 million, five-year contract in January 2010, and has earned an additional $2.5 million in escalators and $300,000 in bonuses.
Seattle general manager Jack Zduriencik said he could not comment when reached Thursday by The Associated Press, and Hernandez's representatives didn't immediately return messages.
If the deal is finalized, it would leave Detroit's Justin Verlander and the Dodgers' Clayton Kershaw as the most attractive pitchers eligible for free agency after the 2014 season. Tampa Bay's David Price is eligible after the 2015 season.
Hernandez has become the face of Seattle's struggling franchise, transforming from a curly-haired 19-year-old who wore his hat crooked to one of the most dominant and exciting pitchers in baseball.
His fiery enthusiasm on the mound and his willingness to first sign a long-term deal in 2010 have endeared him to fans in the Pacific Northwest who have gone more than a decade without seeing postseason baseball.
Hernandez went 13-9 with a 3.06 ERA and 223 strikeouts last season, his fourth consecutive campaign with at least 200 strikeouts. The right-hander pitched the first perfect game in Mariners history on Aug. 15, striking out 12 in a 1-0 victory over the Tampa Bay Rays.
The 2010 American League Cy Young Award winner, Hernandez has pitched at least 232 innings in each of the past four seasons and owns a career record of 98-76 with a 3.22 ERA in eight years, all with the Mariners.
His career record would be even better if he didn't play with one of baseball's worst offenses. Seattle had the lowest batting average in the major leagues in each of the past three seasons. Hernandez has taken 10 losses during that span when he's given up two earned runs or fewer.
For his career, Hernandez has allowed two earned runs or fewer in 141 of 238 starts, but the team is only 99-42 in those games due to the offensive problems.
Locking up Hernandez long term won't solve all the problems that have left Seattle looking up at Texas, Oakland and the Los Angeles Angels in the AL West for most of the past 10 years.
The Mariners have tried to address some of those issues this offseason by trading for Kendrys Morales and Michael Morse to provide more punch to go along with young prospects Dustin Ackley, Kyle Seager and Jesus Montero, who have shown flashes early in their careers.
Information from The Associated Press was used in this report.