The deal is worth $41 million, ESPN's Adrian Wojnarowski reported Monday.
Agent Mark Bartelstein of Priority Sports and Nuggets general manager Tim Connelly reached agreement on the deal late Sunday night, league sources told ESPN.
Plumlee, 27, was acquired from the Portland Trail Blazers in a February trade for center Jusuf Nurkic.
The 6-foot-11, 255-pound Plumlee averaged 9.1 points, 6.4 rebounds, 2.6 assists, 1.1 blocks and 23.4 minutes in 27 games (10 starts) with Denver.
As a restricted free agent, Plumlee could have signed a $4.6 million qualifying offer for the 2017-18 season, allowing him to become an unrestricted free agent next summer.
Plumlee, who was the 22nd overall pick of the Brooklyn Nets in the 2013 draft out of Duke, owns career averages of 9.0 points and 6.5 rebounds in four NBA seasons with Brooklyn, Portland and Denver.