The Chiefs announced the roster move Tuesday night.
Hali did not count against the Chiefs' 53-man roster while he was suspended for the season-opener against Atlanta. He's eligible to return for this week's game at Buffalo.
Sheffield played in 17 games and made one start during two seasons in Kansas City, but he'd often been shuffled back on the depth chart. The former fifth-round draft pick only made eight tackles with the club after spending his rookie season on injured reserve.
Hali is coming off a standout season in which he had 12 sacks and reached his first Pro Bowl.