The Pacers are also adding forward Torrey Craig, who agreed to a two-year, $10 million deal, his agents, Dave Spahn and Austin Brown of CAA Sports, told Wojnarowski.
McConnell, 29, averaged career highs of 8.6 points and 1.9 steals this season for Indiana, while tying his career high with an average of 6.6 assists.
One of the faces of Sam Hinkie's "Process" teams with the Philadelphia 76ers, McConnell has turned himself into a quality backup point guard, a role he filled admirably for Indiana each of the past two seasons.
While he hardly shoots from 3-point range, he has shot over 50% each of the past three seasons, and his combination of safe stewardship of an offense and being a pest defensively has turned him into the kind of rotation guard many teams hoping to break into the playoffs are searching for, particularly ones that can surround him with shooters.
Craig, 30, averaged 7.2 points and 4.8 rebounds in 32 games for the Phoenix Suns last season.
ESPN's Tim Bontemps contributed to this report.