The Army has been providing Manning with treatment for gender dysphoria, including hormone treatments, according to a report in Stars and Stripes.
"If Pvt. Manning is discharged with a dishonorable discharge, she will lose her entitlement to (military) benefits, including gender-transition care at medical treatment facilities," an Army spokesman said.
Manning was a candidate for gender-reassignment surgery, according to the report. It would have been covered under the government's new policy for transgender troops.
The Army anticipates an appeal from Manning.
Manning is more than six years into a 35-year sentence at the military prison at Fort Leavenworth, Kansas for leaking classified government and military documents to the anti-secrecy website WikiLeaks. Her sentence is now set to expire May 17.
Manning was known as Bradley Manning at the time of her 2010 arrest, but revealed after being convicted of espionage that she identifies as a woman.
She accepted responsibility for leaking the material to WikiLeaks to raise public awareness about the effects of war on civilians, and has said she was confronting gender dysphoria at the time of the leaks while deployed in Iraq.
She attempted suicide twice last year, according to her lawyers, citing her treatment at Leavenworth.
Chase Strangio, an American Civil Liberties Union attorney representing Manning, said the president's action "quite literally save Chelsea's life."
"We are all better off knowing that Chelsea Manning will walk out of prison a free woman, dedicated to making the world a better place and fighting for justice for so many," Stangio said in a statement.