Payton was banned along with four Saints players in March last year after the NFL found the team had been paying players bonuses for 'knock-outs' and 'cart-offs', plays on which an opposing player was forced to leave the game.
In December, the players - Jonathan Vilma, Will Smith, Scott Fujita and Anthony Hargrove - had their bans overturned on appeal, but Payton was left to sit out the rest of the season.
The 49-year-old met with NFL commissioner Roger Goodell on Monday and has now been reinstated.
"We had a very productive discussion," said Commissioner Goodell. "Sean fully complied with all the requirements imposed on him during his suspension.
"More important, it is clear that Sean understands and accepts his responsibilities as a head coach and the vital role that coaches play in promoting player safety and setting an example for how the game should be played at all levels."
The decision comes a little under two weeks before New Orleans hosts the Super Bowl, in which the Baltimore Ravens will play the San Francisco 49ers at the Superdome on February 3.
The Saints stood by their coach, considered one of the brightest offensive minds in the league and a Super Bowl winner at the end of the 2009 season, throughout the controversy, and he agreed a contract extension until 2016 in December.