The 38-year-old ended his playing career with the Blues in 2014 and has been working as a television pundit.
Iwelumo replaces Ian Sharps, who moved to League One side Walsall to become their first-team coach.
"Can't wait to get started at such a brilliantly run club," he said on Twitter.
Iwelumo scored once in 10 games for Chester before retiring after a career which saw him play for 19 different clubs including Stoke City, Wolves, Colchester, Burnley and Watford.
National League side Chester have appointed former Scotland international striker Chris Iwelumo as assistant to manager Jon McCarthy.