Olsen guided the four-time MLS Cup-winning franchise to the playoffs for the first time since 2007 last season. D.C. finished with the third-best record in MLS in 2012 and reached the Eastern Conference finals before falling at the hands of the Houston Dynamo.
"Ben has had the leading role in rebuilding D.C. United, and he is extremely deserving to have his option exercised a year in advance," D.C. general manager Dave Kasper said in a team statement. "We are very excited about our future with Ben as our head coach."
Olsen has been the full-time head coach for D.C. for two seasons, after getting the job following an interim stint in the aftermath of Curt Onalfo's dismissal in August 2010. Since getting the job on a permanent basis, Olsen has amassed a 26-23-19 record, including a 17-10-7 mark last season.
Olsen, who was inducted into the club's Hall of Tradition this past September to honor his lengthy and storied career as a D.C. player, also coached the MLS All-Star team to a victory over Chelsea last summer.
"I appreciate the commitment and loyalty this club has given me over the years," Olsen said. "Hopefully I can continue to repay this organization with results and a team that our community is proud of."
The contract extension marks another milestone for Olsen in the last week after he listed on the ballot as a first-time nominee for the National Soccer Hall of Fame on Jan. 25.