diff --git a/packages/server/src/utils/federationAuthFailure.test.ts b/packages/server/src/utils/federationAuthFailure.test.ts
new file mode 100644
index 00000000..da2591d4
--- /dev/null
+++ b/packages/server/src/utils/federationAuthFailure.test.ts
@@ -0,0 +1,35 @@
+import { describe, it, expect } from 'vitest';
+import { evaluateAuthFailure, AUTH_FAILURE_THRESHOLD } from './federationAuthFailure.js';
+
+describe('evaluateAuthFailure', () => {
+  it('returns backoff with incremented count for a first failure', () => {
+    const result = evaluateAuthFailure(0);
+    expect(result).toEqual({ kind: 'backoff', newAuthFailures: 1 });
+  });
+
+  it('returns backoff below the threshold', () => {
+    for (let prev = 0; prev < AUTH_FAILURE_THRESHOLD - 1; prev++) {
+      const result = evaluateAuthFailure(prev);
+      expect(result.kind).toBe('backoff');
+      expect(result.newAuthFailures).toBe(prev + 1);
+    }
+  });
+
+  it('returns transition at the threshold', () => {
+    const result = evaluateAuthFailure(AUTH_FAILURE_THRESHOLD - 1);
+    expect(result).toEqual({
+      kind: 'transition_to_needs_attention',
+      newAuthFailures: AUTH_FAILURE_THRESHOLD,
+    });
+  });
+
+  it('returns transition beyond the threshold', () => {
+    const result = evaluateAuthFailure(AUTH_FAILURE_THRESHOLD + 5);
+    expect(result.kind).toBe('transition_to_needs_attention');
+    expect(result.newAuthFailures).toBe(AUTH_FAILURE_THRESHOLD + 6);
+  });
+
+  it('AUTH_FAILURE_THRESHOLD is 5', () => {
+    expect(AUTH_FAILURE_THRESHOLD).toBe(5);
+  });
+});
diff --git a/packages/server/src/utils/federationAuthFailure.ts b/packages/server/src/utils/federationAuthFailure.ts
new file mode 100644
index 00000000..e37b7723
--- /dev/null
+++ b/packages/server/src/utils/federationAuthFailure.ts
@@ -0,0 +1,28 @@
+/**
+ * Number of consecutive 401/403 responses from an active peer before the
+ * outbox worker transitions that peer to `needs_attention`.
+ *
+ * Rationale (see design spec §Retry Budget): with the existing
+ * BACKOFF_SCHEDULE_MS = [30s, 1m, 5m, 15m, 1h], five consecutive auth
+ * failures span ~21.5 min — covering the 15-min rotation grace window
+ * with ~6.5 min margin while still giving clear signal that a persistent
+ * desync has occurred.
+ */
+export const AUTH_FAILURE_THRESHOLD = 5;
+
+export type AuthFailureAction =
+  | { kind: 'backoff'; newAuthFailures: number }
+  | { kind: 'transition_to_needs_attention'; newAuthFailures: number };
+
+/**
+ * Pure decision function. Given the current consecutive-auth-failure count,
+ * return whether the next failure keeps the peer in retry-with-backoff or
+ * transitions it to the `needs_attention` terminal state.
+ */
+export function evaluateAuthFailure(currentAuthFailures: number): AuthFailureAction {
+  const newAuthFailures = currentAuthFailures + 1;
+  if (newAuthFailures >= AUTH_FAILURE_THRESHOLD) {
+    return { kind: 'transition_to_needs_attention', newAuthFailures };
+  }
+  return { kind: 'backoff', newAuthFailures };
+}