The former prop, who played for the province from 2000 to 2006, has already carved out an excellent coaching reputation with Connacht Rugby, having first been appointed as Forwards Coach in 2006 and then Assistant Coach in 2010.
McFarland, who also played for Richmond and Stade Francais, became only the second player ever (after Eric Elwood) to chalk up 100 caps for Connacht when he played against Munster in 2005.
In 2007, he linked up with Elwood to guide the Ireland U20 team to a grand slam of victories in the Six Nations Championship.
His experience as both Connacht player and coach over the last 12 years is a huge asset to the club going forward.
Chief Executive Tom Sears said: "Dan McFarland is a key part of our coaching structure and we are delighted he will remain so.
We always stressed that we wanted an element of continuity during this period of change and Dan's involvement will be crucial to ensuring we have that. He is a high quality technical coach and just as importantly he is Connacht through and through.
"From the outset Pat Lam was adamant he wanted to have Dan as his assistant and we have no doubt they will work well together. We are still working on finalising the full make up of our coaching staff for next season and will release further details in due course."
Speaking from New Zealand, incoming Head Coach Pat Lam said: "I am delighted to have the opportunity to work alongside Dan. I've been very impressed with the work he has been doing with the Forwards and it provides us with some real continuity which is very important as we aim to build on Eric's foundation. He is held in high regard by Connacht and Irish Rugby so to be able to secure his services going forward is a real coup for our team."
Dan McFarland said: "Connacht and Irish rugby are in my blood and I have been very lucky to be a part of them over the last 12 years, as a player and coach. The opportunities and experiences afforded by working and living alongside people with the ability, passion and determination found in the west of Ireland are very special. These are exciting times for Connacht Rugby and I am very much looking forward to working with Pat and learning from his undoubted experience and knowledge."
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