Williams said Lynn, who was appointed to the position in 2015, will continue to work with the team at the factory, but will also be given time to focus on a serious title challenge in this year's GP2 Series.
"I am really delighted to continue in my Development Driver role with the team this season and remain grateful for their on-going support," said Lynn, who won twice and took four podiums en route to finishing sixth in GP2 last season.
"I relish the opportunity to build on the hard work I put in last year, to continue helping develop the Formula One car and gaining further knowledge of the inner workings of the Williams team from both a technical and human perspective.
"With the team's blessing and support, my main focus this season will be to fight for the GP2 title. I am determined to prove myself worthy of graduating to become a fully-fledged Formula One race driver at some point in the not too distant future."
Claire Williams, deputy team principal of Williams, added: "After a really encouraging first season with the team, we are pleased to be able to continue working with Alex in 2016.
"Alex played an important role in helping develop the team's race cars in 2015, while at the same time demonstrating his talent with a strong debut season in GP2. We're looking forward to seeing him progress this year, both within the team and as he fights for the GP2 title."
Lynn, who was crowned GP3 champion in 2014, has previous F1 experience, having tested for Lotus in 2014 and for Williams last year.