The new terms will keep him at the Ligue 1 club until 2022, Rennes said.
Stephan led Rennes to 10th place in the French top flight, after being promoted from his reserve-team post in mid-season, but it was the club's cup success that provided the outstanding moment.
Rennes defeated big-spending Paris St Germain on penalties after a 2-2 draw at the Stade de France in April.
Club president Olivier Letang said it was "a very great pleasure" to confirm the coach would be staying on.
The 38 year-old said on the Rennes website: "It's a great point of pride to pursue my mission with the first team. This season has been historic and rich in emotions."