Mr Obama celebrated the longtime Delaware senator and Pennsylvania native, saying he was a "lion of American history" and the "best vice president America's ever had", before making the surprise announcement that he was giving Mr Biden the award.
"For your faith in your fellow Americans, for your love of country, and for your lifetime of service that will endure through the generations, I'd like to ask the military aide to join us on stage," Mr Obama said. "For my final time as President, I am pleased to award our nation's highest civilian honour, the Presidential Medal of Freedom."
The President bestowed the honour on Mr Biden with "an additional level of veneration" – making him the fourth person in US history to receive the award, along side Pope John Paul II, President Ronald Reagan, and former Secretary of State Colin Powell.
Mr Biden, who had already had tears in his eyes from the farewell event – which he believed was to be a simple toast between him, the President, and senior staffers – accepted the honour in a tearful speech, thanking the President, his staff, his wife, Dr Jill Biden, and First Lady Michelle Obama.
Mr Obama honoured Mr Biden for serving public office for almost half a century, which included decades in the Senate and two terms as Vice President. During his time in public service, he authored the Violence Against Women Act, spearheaded the Cancer Moonshot initiative, and led the "It's On Us" campaign against sexual assault on college campuses.
But despite his decades of work, he said he owed all the credit to those around him.
"I get a lot of credit I don't deserve because I've had so many people to lean on," he said.
He thanked Mr Obama especially for giving him a much more powerful vice presidency than normal by having him serve as a top advisor in the Oval Office.
"Mr President, you know that with good reason there is no power in the vice presidency... and there is no inherent power, nor should there be," he said. "Mr President, you have more than kept your commitment to me by saying that you wanted me to help governent.
"Every single thing you’ve asked me to do, Mr President, you have trusted me to do. And that is a remarkable thing."
Mr Obama recalled sentiment he expressed in his farewell address to the nation on Tuesday, where he referred to Mr Biden as a brother. In the final days of the Obama administration, the President proclaimed that while their time in office is almost up, they will be "forever binded as family".
"This is a remarkable man," Mr Biden said of Mr Obama. "I just hope that the asterisk in history that is attached to my name when they talk about this presidency is that I can say I was part of a journey of a remarkable man who did remarkable things for this country."
After he leaves office, Mr Biden has said he will "set up shop" to continue his cancer "moonshot" work at the university's Ambramson Cancer Centre. The Vice President suffered a major loss in 2015 when his son, Beau, died from brain cancer.
The Joe Biden Cancer Initiative seeks to cure cancer within five years. Mr Obama announced the initiative in his final State of the Union address last year, but Mr Biden said he did not yet have the necessary resources to complete the task during the administration's final term.
In Mr Biden's executive report delivered to Mr Obama this week, he said he now has the momentum and support to achieve such an ambitious humanitarian goal.
"We had access to the world’s best nurses, physicians, and researchers. And the more time we spent with them, the more we understood that even if we couldn’t save our son, the science, medicine, and technology are progressing faster than ever to save countless other sons and daughters," Mr Biden said in the report.
"There’s a recognition that the cancer system of the 20th Century must be reimagined for the 21st Century to match the breakthroughs creating an inflection point in this fight."