The 30-year-old made 14 appearances for Keith Hill's men after moving to Spotland on non-contract terms in February following his release by Colchester.
"Michael is a quality player, he's an exceptional talent and a creator," said Hill on Dale's official website.
"It has been my desire since he came to the Football Club to extend his deal past the end of the season so I'm delighted he's agreed to a two-year-deal.
"He wants to be successful and he wants to be successful over the next two years with Rochdale Football Club."
Rochdale last week