The franchise tender for linebackers is worth $13.195 million for the 2015 season as part of the overall salary cap being set at $143.28 million.
The Chiefs and Houston have until July 15 to agree on a long-term contract. If they don't have a deal in place by then, they can't agree on one until after the 2015 regular season.
"Justin is a talented player and a key contributor to our defense," Chiefs general manager John Dorsey said in a statement. "Today was the deadline to designate a franchise player, and it was in the best interest of the club to place the tag on Justin. We will continue to discuss long-term options with him and his agent. Our goal is to reach a deal that is mutually beneficial. We want to keep Justin in a Chiefs uniform for years to come."
Houston, 26, flirted with greatness during his first three NFL seasons (2011-2013) and arrived in 2014, when he led the NFL in sacks with 22, finishing a half-sack from the NFL record set by Michael Strahan of the New York Giants in 2001.
Houston was a consistent pass-rusher, registering at least one sack in 13 games. Houston was Pro Football Focus' top-rated 3-4 outside linebacker by a wide margin as he also played well against the run and in pass coverage.
He was selected to his third straight Pro Bowl, though after going through the week of practice he didn't play in the game because of what he said was an illness.
Houston has posted 43 disrupted dropbacks (sacks, passes defended, interceptions and batted balls) over the past two seasons, trailing only the Houston Texans' J.J. Watt in that department, according to ESPN Stats & Information.
The deadline for teams to place the franchise tag on their pending free agents is 4 p.m. ET Monday.
ESPN.com Chiefs reporter Adam Teicher contributed to this report.