Hendry, 48, called time on his playing career following the 2012 World Championship and has continually reiterated he has not been tempted to come out of retirement.
However, following a revamp of the World Seniors Championship, announced earlier in the week, Hendry is set to take part and vie for the carrot of a place in the First Qualifying Round of the World Championship.
O'Sullivan, who is currently bidding to eclipse Hendry's tally of six Masters titles, believes the sport's governing body should do everything in its possibility to pave the way for a return of 'The Crucible King'.
"I think Stephen should be given a bye to play in any tournament he chooses," said O'Sullivan.
"He's the greatest player ever to have played this game and the greatest ambassador. I believe this sport should roll the red carpet out for him and invite him into more things like they do for Jack Nicklaus at the Masters.
Seven-time World Champion Hendry receives applause after announcing his retirement form the sport in 2012 (Photo credit should read PAUL ELLIS/AFP/Getty Images)
"Why should someone like him have to rely on winning a certain tournament? Snooker should be putting an arm around him and making sure that he's looked after.
"You can't stick him in a cubicle somewhere and expect him to qualify - he's a seven-time world champion and got a bit of class and dignity as a human being.
"I think he would play – he realises that having something in his life gives him a little bit of purpose and adrenaline - but you won't get him going to qualifiers and he shouldn't have to," he added.
Commenting on his own career, 'The Rocket' admitted time is running out for him to add to his haul of 28 ranking titles based on his struggle for consistency this season.
"Being realistic, I think I've got two or three years of decent opportunities to win tournaments, but if I haven't, then I just need to accept that I'm not the player I was over the last four or five years."
"As long as I can play and do my job to a certain standard, I have great belief that I can win but, if not, you expect to lose."