I have been a flag football official for the past 5 years and have officiated at the National Invitational Collegiate Flag Football Championships in New Orleans the past 3 years. I say this not to brag, but to illustrate my familiarity with the sport. I'm also starting my 3rd year of high school football as well. The games are similar, but there are some fundamental differences.
In flag football, the penalty for illegal contact or pass interference is 10 yards, not 5 or 15 (loss of down for pass interference). We only have 5 and 10 yard penalties. There are no 15 yard penalties in flag football. This play sounds like pass interference, as every player on the field is an eligible receiver in this game. An accepted penalty in this case will result in the ball being placed at the 14 yard line. The down will be dependant upon the call. (3rd down if illegal contact, 4th down if pass interference) A sort of unwritten rule for flag officials is that if contact occurs before the ball is released, it is simply illegal contact. I am not a black and white official so I can differentiate between these two situations. However, the rules for flag are the same as Federation. Pass interference restrictions begin at the snap for Team A, and when the ball is released for Team B. It is much easier to sell an illegal contact call against a player when the ball never made it to his side of the field than it is to sell a pass interference penalty, especially if it is before the ball is even released.
The rules for flag football are published by the National Intramural-Recreational Sports Association (NIRSA).
http://www.nirsa.org I'm currently on the Flag-Touch Football Rules Committee and we are publishing the new version of the rulebook next year.