Bjorkgren spent three seasons with the Phoenix Suns before joining head coach Nick Nurse's staff in Toronto at the start of the 2018-19 campaign.
"I am honored to take on the role as head coach of the Indiana Pacers. This is something I have prepared for during my career," Bjorkgren said. "I'm looking forward to working with this great team to achieve our goal as NBA champions," he added.
The 45-year-old coached in the G League for eight seasons, serving as an assistant under Nurse with the Iowa Energy from 2007-2011. Bjorkgren went on to earn a 126-74 record as a G League head coach across four seasons before joining the NBA ranks.
Bjorkgren, who interviewed for the Pacers' coaching gig last month, won a championship with Toronto in 2019. He's replacing Nate McMillan, who was dismissed shortly after Indiana's playoff exit in August, on the Pacers' bench.
"We are very pleased and excited to have Nate as our new coach," Pacers president of basketball operations Kevin Pritchard said. "This was an extensive and thorough search, and when we reached the conclusion, we felt strongly Nate is the right coach for us at the right time."
Indiana has qualified for the playoffs in five consecutive seasons. The Pacers were swept out of the first round for the second straight year under McMillan.